CHINA CRUISE LINE LTD AND OTHERS v. STAR YIELD CORPORATION LTD AND ANOTHER

HCA 798/2019

[2021] HKCFI 2970

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 798 OF 2019

_______________

_______________

  ________________

J U D G M E N T

___________________

A.   INTRODUCTION

1.  These proceedings concern a joint venture that has failed miserably.  By the end of this trial, I had no hesitation in concluding that the Plaintiffs were victims of a scheme by the Defendants to attract business investors with little more than empty promises.

2.  On the first day of the trial, I drew counsel’s attention to my concerns regarding some of the Plaintiffs pleaded reliefs.  This resulted in an application by summons dated 21 September 2021 for leave to file an Amended Statement of Claim and a Supplemental Witness Statement of Yang Yong (“Amendment Summons”). Although the Defendants did not appear in this trial, they are still reachable by the Plaintiffs’ solicitors.  I therefore allowed the Amendment Summons after a short adjournment to enable service of the relevant papers, and the trial proceeded swiftly on the basis of the amended claim.

B.   BACKGROUND

B1.   The Parties

3.  Much of the background is extracted from the Plaintiffs’ Amended Statement of Claim and Opening Submissions (“Opening”).  

4.  The 2^nd Defendant (“Lau”) is the sole owner and director of the 1^st Defendant (“Star Yield”).  The Defendants are not legally represented and have not turned up at the pre-trial review or the trial itself.  

5.  Mr Yang Yong (“Yang”) is the owner and operator of “重慶洋世達實集團”, a conglomerate based in the Mainland with key interests in property development and management, ship-building, hospitality, and logistics.

6.  Yang is the sole owner and director of the 2^nd Plaintiff (“Fordden”), a company incorporated in the British Virgin Islands which holds shares in 50% of the 1^st Plaintiff (“China Line”) and 90% of the 3^rd Plaintiff (“First Choice”).  The remaining shares of First Choice are held by Ko’s Investment Limited, a company under the sole control and ownership of Mr Ko Hui Wing (“Ko”).

7.  The 4^th Plaintiff (“China International Cruise”) is a Hong Kong-incorporated company whose only two directors are Yang and Ko.  The company has an issued share capital of HK$10,000 comprising 10,000 fully paid-up shares.  Following a transfer of shares which took place on 22 November 2018 (“Share Transfer”), Star Yield emerged as a 45% registered shareholder of China International Cruise.  The effect of the Share Transfer on the registered shareholdings of the company is illustrated in the table below:

Registered Shareholdings of China International Cruise
	Before Share Transfer	After Share Transfer
Fordden (P2)	90% (9,000 Shares)	49.5% (4,950 Shares)
First Choice (P3)	10% (1,000 Shares)	5.5% (550 Shares)
Star Yield (D1)	‒	45% (4,500 Shares)

B2.   Underlying Facts

8.  From the outset, it is important to note that a substantial portion of the Plaintiff’s case is not positively denied by the Defendants.  The facts set out in this subsection are either expressly admitted in the Defence or are not the subject of any serious dispute.

9.  In mid-March 2018, Yang (acting on behalf of China Line) approached Lau (acting on behalf of Star Yield) with the intention of establishing a joint venture to acquire and operate cruise ships for tourism purposes (“Project”).  In preparation for the Project, China Line had already received a right to use a cruise ship route (“Route Right”).

10.  During the meeting, Lau informed Yang that Star Yield had the capacity to arrange funding for the Project by procuring bank guarantees and standby letters of credit.  The Defendants admit that on 16 April 2018, Lau gave Yang a Proof of Funds purportedly issued by HSBC on 9 April 2018 showing that he had cash funds in the order of US$10,000,000,000.00 in his personal account (“April 2018 Proof of Funds”).

11.  Quite apart from Lau’s colossal wealth (in cash), there are a few other surprising features about the April 2018 Proof of Funds which, in hindsight, might have raised some eyebrows:

(1)  First, the cover letter accompanying the April 2018 Proof of Funds contains a promise from HSBC that the monies in Lau’s personal custody are “legal, good, clean, unencumbered and legitimately earned cash funds of non-criminal origin, and are freely available for investment.”

(2)  Second, the April 2018 Proof of Funds is signed by “Peter Wong Tung Shun, Deputy Chairman” and “Diana Cesar, Chief Executive Officer” in their capacity as managers of the account.

12.  Subsequently, Lau provided Yang with a declaration made at the Yau Tsim Mong District Office on 8 May 2018 stating that the information contained in the April 2018 Proof of Funds was true and correct (“May 2018 Declaration”).

13.  Meanwhile, China Line and Star Yield entered into a Memorandum of Understanding on 17 April 2018 (“MOU”).  The preamble to the MOU contains the following statements:

(1)  Star Yield has the capability to arrange funding for the purchase and operation of a cruise by way of a bank instrument; and

(2)  Lau, on behalf of Star Yield, confirms that Star Yield’s bank accounts at HSBC in London have sufficient financial capability to provide China Line with funding by means of a bank instrument (“MOU Representations”).

14.  On 19 September 2018, China Line and Star Yield entered into a Joint Venture Agreement (“JV Agreement”).  The essential terms of the agreement are summarised below:

(1)  Clause 4 of the Recital provides that China International Cruise (i.e., the 4^th Plaintiff) will be used as the corporate vehicle for the joint venture.

(2)  Clause (2) says that Star Yield warrants and declares that it has all necessary approval and full corporate authority and legal responsibility, under penalty of perjury, and that it is ready, willing, and able to obtain money in its own name to fund the Project from a third party by way of a bank guarantee or standby letter of credit.

(3)  Clause (3) states that upon signing the JV Agreement, China Line shall, within 3 bank working days thereafter, pay an upfront payment of US$1,000,000.00 in cash to Star Yield (“Upfront Payment”).

(4)  Clause (3) further states that within 55 days from the date of receiving the Upfront Payment, Star Yield will organise and arrange a bank guarantee or standby letter of credit with a third party for a monetised sum of US$250,000,000.00 (“Loan”), to be paid into a designated account of China International Cruise via a globally recognised financial institution, such as an international bank, to start the Project.  The monetised fund shall be paid into the said designated account within 3 days of expiry of the said 55 days (“Early Draw Down Date”) or 10 bank working days prior to the 1^st payment date for the Project (“Later Draw Down Date”) (collectively, the “Draw Down Date”).

(5)  Clause (4) provides that if Star Yield is unable to realise or make payment of the Loan on the Early Drawn Down Date, it shall immediately return the Upfront Payment in full to China Line.  If Star Yield is unable to return the said funds, interest “at the then best lending rate per month of HSBC” shall be paid by Star Yield until the Upfront Payment is paid to China Line in full.

(6)  Pursuant to Clause (7), China Line undertakes to “proceed with the Project and the Route Right”.  China International Cruise will also issue 45% of its ordinary paid-up shares to Star Yield as collateral for the Loan.

(7)  Clause (9) states that upon full repayment of the Loan, Star Yield will immediately release its entire 45% shareholding in China International Cruise and transfer the same at nil consideration to China Line or a nominated party.

15.  In performance of the JV Agreement, China Line remitted the Upfront Payment to Lau’s personal bank account at the Bank of East Asia (“Bank of East Asia Account”) in accordance with Star Yield’s written instructions on the same day.  It appears that after making the Upfront Payment, China Line continued its negotiations with cruise ship vendors in pursuit of the Project.

16.  Upon the expiry of the Early Draw Down Date on 16 November 2018, China International Cruise had yet to receive any part of the Loan from Star Yield.  As a result of enquiries made by China Line, Lau gave Yang a Proof of Funds purportedly issued by HSBC on 5 October 2018 showing that Star Yield had cash funds in the order of US$880,000,000.00 (“Star Yield Proof of Funds”).

17.  The Share Transfer took place on 22 November 2018, when Yang and Ko caused 45% of the registered shareholdings of China International Cruise to be transferred from Fordden and First Choice to Star Yield (see paragraph 7, above).

18.  On 27 November 2018, China International Cruise and a Korean company known as Galaxy Cruise Line Co Ltd (“Galaxy”) entered into a Consulting Agreement (“Consulting Agreement”), which would bind the parties automatically upon China International Cruise entering into a memorandum of agreement to purchase a cruise ship.  Pursuant to the Consulting Agreement, China International Cruise would pay Galaxy a total of US$20,000,000.00 within 30 days of signing the aforesaid memorandum.

19.  On or around 12 December 2018, Lau provided Yang with a further Proof of Funds purportedly issued by HSBC confirming that US$260,000,000.00 in cash funds had been deposited into an account numbered 404-021834-838 in the name of China International Cruise, and that Yang was the sole authorised signatory of the said account (“China International Cruise Proof of Funds”).

20.  On 27 December 2018, Galaxy entered into a memorandum of agreement with Jewel Owner Ltd (“Jewel Line”) to purchase a Bahamian-flagged vessel known as the MV Gemini (“MV Gemini Memorandum of Agreement”).  Pursuant to this agreement, Galaxy would pay US$28,000,000.00 (equivalent to 10% of the purchase price) as a deposit before 10 January 2019.

21.  At the request of China Line, Lau on behalf of Star Yield issued three essentially identical letters dated 31 January 2019 to Jewel Line, Galaxy, and Royal Caribbean Cruises Ltd (“Royal Caribbean”).  These letters sought to assure the said addressees that a US$260 million investment had been “basically prepared” under an HSBC account of China International Cruise, which could be “verified” through specific bank-to-bank protocols.

22.  The Defendants accept that the Loan has not been advanced to China International Cruise despite China Line’s repeated demands and requests.  By a letter dated 29 April 2019 (“Demand Letter”), the Plaintiffs’ solicitors on behalf of China Line wrote to Star Yield asserting, amongst other things, that:

(1)  Star Yield had acted wrongfully and in repudiatory breach of the JV Agreement by refusing to make arrangements for the procuring of the Loan to China International Cruise.

(2)  In the light of China Line’s acceptance of the aforesaid repudiatory breach, the JV Agreement had come to an end and all of China Line’s contractual obligations had been discharged.

(3)  China Line was entitled to immediate repayment of the Upfront Payment plus contractual interest at HSBC’s “best lending rate (currently at 4.75% per annum)” from 17 November 2018 until payment.  Additionally, Star Yield was now liable to return its shareholdings of China International Cruise.

23.  On 6 May 2019, Lok J granted a Mareva injunction against Star Yield and Lau from, inter alia, (a) removing any assets from Hong Kong up to the value of US$1,000,000.00, or (b) in particular, disposing of, dealing with, or diminishing the value of Star Yield’s shareholdings in China International Cruise, or any money in the Bank of East Asia Account in Lau’s name up to the said amount.  The learned Judge also granted a banker’s record authorisation over the Bank of East Asia Account pursuant to s. 21 Evidence Ordinance (Cap. 8).

B3.     The Plaintiffs’ Allegations

24.  In broad terms, the Plaintiffs’ pleaded case is that:

(1)  China Line was induced to enter into the JV Agreement on 19 September 2018 in reliance on the April 2018 Proof of Funds, the MOU Representations, and the May 2018 Declaration.  China Line also relies on alleged representations made in or around the middle of March 2018, where Lau told Yang that Star Yield had the means, experience, and financial capacity to arrange for funding of the Project (“March 2018 Representations”) (collectively, “Pre-Contractual Representations”).

(2)  The Pre-Contractual Representations were false, untrue, and fraudulently made by the Defendants.  Furthermore, the contents of the Pre-Contractual Representations, the Star Yield Proof of Funds and/or the China International Cruise Proof of Funds were fraudulent misrepresentations, in that Lau and Star Yield (by imputation) knew they were false or had made them recklessly without regard to their truthfulness.  The Plaintiffs aver that:

(a)  On or around 19 July 2018, Royal Caribbean informed Yang and Ko that the April 2018 Proof of Funds was invalid and had not been issued by HSBC.

(b)  By WeChat messages on or around 12 December 2018, Lau falsely informed Yang and Ko that the Proof of Funds provided by the Defendants could only be verified by an “Interbank Screen System” at a cost of HK$450,000 and/or “Swift MT 799 System” at a cost of HK$2,500,000.00.

(c)  On 19 February 2019, Yang and Ko enquired with HSBC and discovered that the China International Cruise Proof of Funds was untrue and fraudulently made, as China International Cruise was not the holder of account number 404-021834-838.

(d)  On 23 April 2019, a staff member of HSBC informed the Plaintiffs’ solicitors that the contents of the April 2018 Proof of Funds, Star Yield Proof of Funds, and the China International Cruise Proof of Funds were all untrue.

(3)  The aforesaid representations and Proof of Funds were all made with the intention that they would induce and be relied on by the Plaintiffs to transfer the Upfront Payment, effect the Share Transfer (for nil consideration), or otherwise delay any investigations and proceedings against the Defendants.

(4)  The JV Agreement contains an implied term to the effect that Star Yield and Lau are only entitled to use the names of or otherwise disclose the existence of cooperation with China Line and China International Cruise for as long as the contractual agreement subsists.

(5)  At the time when the JV Agreement was signed, the Defendants knew that China Line was negotiating with various vendors of cruise ships for the Project, including Jewel Line, Royal Caribbean, and Galaxy.  It was also known that the purpose of the Loan was to obtain financing for the Project.

(6)  The Upfront Payment was made for the specific purpose of and upon the belief and understanding that it would be used solely for the purpose of procuring the Loan.

25.  The Statement of Claim contains a host of different reliefs against Star Yield and Lau including:

(1)  Declarations that Star Yield holds its shares in China International Cruise on constructive trust for and on behalf of Fordden and First Choice and is liable to account for all benefits and profits derived therefrom.

(2)  Declarations that Lau is liable to account to China Line for the Upfront Payment, being the proceeds of his fraudulent misrepresentation and deceit, as a trustee or constructive trustee on the grounds of dishonest assistance and/or knowing receipt.

(3)  All necessary accounts and inquiries against Lau to enable China Line to trace and recover the Upfront Payment, together with any interest and profits accrued or derived by Lau from those funds.

(4)  Restitution of the Upfront Payment from Lau on the basis of unjust enrichment / money had and received, or, alternatively, an order for equitable compensation or damages.

(5)  “Payment” equivalent to the amount of the Upfront Payment for Star Yield’s repudiation of the JV Agreement or dishonest assistance, or alternatively, for fraudulent misrepresentation and deceit on the part of Star Yield and Lau.

(6)  Damages (to be assessed) for losses suffered by China Line’s breach of the Consulting Agreement and Galaxy’s breach of the MV Gemini Memorandum of Agreement, together with “further or future loss”.

(7)  An injunction restraining Lau from otherwise dealing with or otherwise disposing of the Upfront Payment.

(8)  An injunction restraining the Defendants from using the name of China Line and China International Cruise or otherwise disclosing any matters related to the Defendants’ cooperation with them.

(9)  Contractual interest accruing on the Upfront Payment up to the date of Judgment at the best lending rate per month of HSBC.

B4.     The Defendants’ Response

26.  Apart from a series of bare denials, the Defendants have not put forward a positive response to the Plaintiffs’ allegations.  The only explanation proffered is that the fund-raising exercise is still progressing uneventfully.  No concrete evidence has been filed in support of this claim.

C.   ANALYSIS

C1.   Findings

27.  In my judgment, it is self-evident that the JV Agreement has been breached by reason of Star Yield’s failure to perform any part of its bargain therein, and that the Plaintiffs are entitled exercised their right to terminate the contract. [1]  The Defendants’ suggestion that the Plaintiffs knew the fundraising process might be held back by delays is not a complete answer against an allegation of breach.

28.  As to the allegation of fraudulent misrepresentation and deceit, it needs to be shown that:

(1)  A false representation was made to the Plaintiffs by or on behalf of the Defendants.

(2)  The representation was made fraudulently, in that the Defendants knew that the representation was false, suspected that it might not be true, or was reckless as to its truth.

(3)  The Defendants intended the Plaintiffs would act on the representation.

(4)  The representation induced the actions of the Plaintiffs, such that they suffer the losses claimed: Zhang Yan v ASA Bullion Ltd [2019] HKCFI 179 at §20(1).

29.  The mere fact that the Defendants have not appeared in Court does not absolve the Plaintiffs from proving their case.  This is especially true where serious allegations of fraud and forgery of documents are involved: Choi Lisa Mei Yin v Yau Pak Kin [2020] 2 HKC 228 at §§31-36.  As Kwan VP explained in that decision, the principles in Re H & Ors (Minors) (Sexual Abuse: Standard of Proof) [1996] AC 563 apply by analogy; the Court must bear in mind the seriousness of the misconduct alleged, recognising that it carries an inherent degree of improbability.

30.  Having considered the evidence before me however, I find that the Pre-Contractual Representations were made with the intention of luring the Plaintiffs into signing the JV Agreement and making the Upfront Payment.  It is also apparent from the evidence that the Pre-Contractual Representations were not only false, but a product of deception from the outset.  It is not necessary to set out each and every point which lends credence to the Plaintiffs’ case of fraudulent misrepresentation, save as to highlight the following matters in addition to those mentioned in paragraph 24(2) above:

(1)  From the WeChat messages produced, it appears to me that the Defendants had run out of plausible explanations to justify the prolonged delay in securing funding for the Project.  In February 2019, Lau and his associates informed Yang that the Loan had inexplicably become subject to approval from the mainland state authorities and the Hong Kong Monetary Authority as it was part of a US$600 billion development project for the Chinese Government.  Communications between the Defendants and Yang finally ceased sometime around 16 March 2019.

(2)  By a letter dated 2 May 2019 in answer to inquiries made by the Plaintiffs’ solicitors, HSBC confirmed that the April 2018 Proof of Funds, the Star Yield Proof of Funds, and the China International Cruise Proof of Funds were not issued by HSBC.

(3)  On 18 February 2020, HSBC clarified that it had no knowledge of a verification process for Proof of Funds through the “Interbank Screen System” or “Swift MT 799 System” previously mentioned by Lau to Yang.

31.  I recognise that some of the alleged falsehoods relied on by the Plaintiffs post-date the JV Agreement and Upfront Payment.  I consider that the Plaintiffs may rely on these later representations in order to show that the Pre-Contractual Representations were part of a wider course of fraudulent and deceitful conduct by the Defendants ‒ thus reinforcing the fact that they were made dishonestly or recklessly without regard to the Defendants’ ability to raise funds for the Project.

C2.   Constructive Trust over the China International Cruise Shares

32.  I will now briefly deal with Star Yield’s shareholding in China International Cruise.  This does not appear to be an issue of great dispute as Star Yield expressly accepts that it holds those shares on constructive trust for Fordden and First Choice.  As Clause (7) of the JV Agreement stipulates that the purpose of the Share Transfer was to provide collateral for the Loan, there is no reason why Star Yield should remain in custody of those shares when it is clear that the Loan is not forthcoming and where the JV Agreement has been terminated.

C3.   Recovery of the Upfront Sum

33.  The Plaintiffs seek various means of recovering the Upfront Sum from the Star Yield and Lau.  It is conceded in the Statement of Claim that the Defendants are liable “jointly and severally” to recover sums “equivalent” to the Upfront Payment.  Section 31 of A Restatement of the English Law of Contract (2^nd Ed., 2020) (“Restatement”) provides at

“31 Combining Remedies

(1) Subject to subsections (2) and (3), a remedy for breach of contract may be combined with any other remedy, whether for breach of contract or not (for example, damages for breach of contract may be combined with termination or with specific performance or with a monetary restitutionary award for unjust enrichment).

(2) Remedies cannot be combined if the combination is inconsistent (for example, termination for breach and specific performance, or rescission for misrepresentation and damages for breach).

(3) Satisfaction of more than one monetary remedy is not permitted to the extent that it would produce double recovery.” (Emphasis added)

34.  In his Opening, Mr Leung Sze Lum for the Plaintiffs did not directly mention China Line’s entitlement to monetary relief against Star Yield under Clause (4) of the JV Agreement (despite providing very lengthy submissions on why a breach of contract had occurred).  Rather, Mr Leung’s submissions on recovery of the Upfront Payment are directed solely at the claims against Lau personally.

35.  Mr Leung firstly submits that Lau holds the Upfront Payment and any or all accrued profits or interest derived therefrom on constructive trust by reason of fraud, misrepresentation, dishonest assistance or knowing receipt.

36.  My primary concern with this line of argument is that the mere existence of fraud does not always give rise to a constructive trust.  As the editors of Snell’s Equity (34^th Ed., 2020) explain at §26-011:

“It has been said that … jurisdiction by which a court of equity, proceeding on the ground of fraud, converts the party who has committed it into a trustee for the party who is injured by that fraud…

But in common with all other situations where a trust may be imposed by operation of law, it would be incorrect to interpret such a statement as a general test for when a constructive trust will be imposed. While the cases recognise many instances of fraud where a trust has been imposed, there is no “universal principle that whenever there is personal fraud the fraudster will become a trustee for the party injured by the fraud” [citing Halifax Building Society v Thomas [1996] Ch 217 at 228] …” (Emphasis added)

37.  The editors continue at §26-012 and §26-013 to draw a line between cases of “fraudulent taking” and those of “fraudulently induced transfers”:

“A distinction must be drawn between fraud consisting in the outright taking of a person's property, wholly without his consent, and a transaction induced by a fraudulent misrepresentation…

In the second case, where the claimant is the victim of a fraudulent misrepresentation which induces him to transfer his property to his defendant, the transaction is valid until the claimant elects to resend it ... On rescission by the claimant, the defendant holds his legal interest in the property on resulting trust. Since the trust arises only at that stage, the defendant cannot be taken to have owed duties qua trustee before then. Nor can any misapplication of money by the defendant be treated as a breach of trust until after recission…” (Emphasis added)

38.  To my mind, the following principles are germane to the present discussion:

(1)  Even in equity, a contract obtained by a fraudulent misrepresentation is almost always voidable, not void: Lonrho plc v Fayed (No 2) [1992] 1 WLR 1 at 11H-12C.

(2)  The exception to this rule is “where a contract is not merely induced by fraudulent misrepresentation but is itself the instrument of fraud and no more than a vehicle for obtaining fraud by false pretences”, thereby being “akin to theft”. A party seeking to rely on this exception faces a very steep hurdle, as the Court is essentially being asked to find that the relevant contracts are not only vitiated, but wholly fictitious and devoid of any legal effect: Global Currency Exchange Network Ltd v Osage 1 Ltd [2019] 1 WLR 5865 at §§40-41.

(3)  As a basic principle, a “voidable” contract is regarded as having been validly formed unless and until one of the parties exercises the right of rescission.  Until then, the contract remains binding on the parties: Wong Man Kam Patrick v Ecosuccess Ltd [2021] HKCFI 1725 at §32(1).

(4)  An election to rescind must be “clear and unequivocal”: Wong Man Kam Patrick at §§32(2), 33-34. 

(5)  Whether at law or in equity, rescission is “always the act of the party himself” which, when validly effected, entitles the rescinding party to be “put into the position he would have been if no contract had been entered into”.  The function of the Court is to adjudicate on the purported disaffirmance of the transaction and make appropriate consequential orders: Alati v Kruger (1955) 94 CLR 216 at 224, cited in Independent Trustee Services Ltd v GP Noble Trustees Ltd [2013] Ch 91 at §55; Shalson v Russo [2005] Ch 281 at §122.

(6)  Title to property passes at law and equity under a voidable transaction.  Until rescission takes place, the owner has no proprietary interest in the original property; all that he has is a “mere equity” of his right to set aside the voidable contract.  Strictly speaking, a “mere equity” is neither an interest in the property, nor a chose in action, but a personal right to recover title upon rescission: Independent Trustee Services Ltd at §53; Global Currency Exchange Network Ltd at §48; The Law of Rescission (2^nd Ed., 2014) at §16.12.

(7)  Whilst the issue is not entirely settled, it appears that upon a party’s election to rescind a contract procured by fraud, the beneficial title that had passed to the representor is capable of reverting to the representee by means of a resulting trust prior to any court order.[2]  This leaves the representee with a sufficient proprietary right entitling him to trace, follow and recover what can be regarded as “having always been in equity his own property”.  In other words, title retrospectively revests to the rescinding party “from the outset, when ownership was first transferred”: Independent Trustee Services Ltd (supra); Shalson v Russo (supra); The Law of Rescission at §§16.25-16.27, 16.39-16.40.

39.  Once a representee has elected to affirm the contract, that affirmation is irrevocable. As the authors of The Law of Rescission note at §23.73, the representee may elect to affirm the contract through various means, including:

“… where correspondence between solicitors treats the contract as valid and the pleading admits certain contractual obligations, or seeks damages for their breach, or where orders are obtained from the court consistent only with the transaction remaining on foot.”

40.  Mr Leung accepted that the JV Agreement had not been rescinded by China Line.  The suggestion of rescission is difficult to reconcile with the pleaded case that China Line had suffered “loss and damage” as a result of Star Yield’s repudiatory breach of contract.  Indeed, the draft order handed up by Mr Leung implicitly seeks to enforce the JV Agreement by proposing contractual interest at the “best lending rate of HSBC in the Hong Kong Special Administrative Region”.

41.  Mr Leung nevertheless submitted that once Lau had acquired the Upfront Payment, the law imposed a constructive trust in response to the unconscionability of Lau’s continued retention of monies which he knew had been obtained by his own fraud: see Westdeutsche Landesbank Girozentrale v Islington LBC [1996] AC 669 at 714C onwards per Lord Browne-Wilkinson.  However, commenting on these passages in Shalson v Russo, Rimer J (as he then was) said, at §111:

“… As to Lord Browne-Wilkinson’s more general proposition in the second paragraph that property obtained by fraud is automatically held by the recipient on a constructive trust for the person defrauded, I respectfully regard the authorities he cites as providing less than full support for it. At any rate, they do not in my view support the proposition that property transferred under a voidable contract induced by fraud will immediately (and prior to any rescission) be held on trust for the transferor.” (Emphasis added)

42.  I respectfully agree with these observations.  Ultimately, no trust arises in the present case because the impairing effect of a misrepresentation on the quality of a representee’s consent to enter into an agreement is insufficient to render that transaction void in the absence of an election to rescind.  It may have been open for the Plaintiffs to disaffirm the impugned transactions, but the Court simply has no power to make that election on the representee’s behalf.

43.  In summing up this discussion, I am of the view that the Defendants cannot be constructive trustees of funds paid in performance of a contract that has never been rescinded.  In the light of my conclusion, the Plaintiffs cannot rely on knowing receipt or dishonest assistance against Lau as both of these remedies are premised on a breach of a pre-existing trust relationship (which has never existed in the present case): Lewin on Trusts (20^th Ed., 2020) at §§42-023, 43-014.

44.  Mr Leung further contends that the Upfront Payment was the subject of a Quistclose trust.  The problem with this argument is that the pleadings and evidence when viewed as a whole do not go far enough towards establishing the elements of such a trust.  The mere fact that monies have been paid for a specific purpose is insufficient; the Plaintiffs must demonstrate that the Upfront Payment was not at Lau’s free disposal (in the sense that it could not have been used as part of his personal cashflow) and had to be applied exclusively for a particular purpose.  The trust must also exist from the moment when the Upfront Payment was made: Fu Kong Inc v Hua Yun Da Group [2004] 3 HKLRD 87 at §47, citing Twinsectra Ltd v Yardley [2002] 2 AC 164.

45.  Lastly, Mr Leung argues that Lau is liable to return the Upfront Payment as restitution of unjust enrichment.  To succeed, the Plaintiffs must show that Lau was enriched at the expense of China Line, the said enrichment falls within a recognised unjust factor, and there are no applicable defences: Shanghai Tongji Science & Technology Industrial Co Ltd v Casil Clearing Ltd (2004) 7 HKCFAR 79 at §67.  On the facts, I am satisfied that Lau has been unjustly enriched, in that the commonly understood purpose of the direct transfer of enrichment to Lau from China Line has totally failed.

46.  There are two other reliefs which the Plaintiffs are entitled to seek.  First, termination of the JV Agreement has no effect on any contractual obligations which have accrued prior to such termination.  Accordingly, China Line is entitled to sue on the JV Agreement to recover the Upfront Payment from Star Yield, with interest.  Second, the Plaintiffs’ failure to plead rescission does not prevent them from claiming damages for misrepresentation.

C4.   Other Damages and/or Indemnity

47.  The original Statement of Claim sought damages for future losses stemming from the Consulting Agreement and the MV Gemini Memorandum of Agreement.  Following my discussions with Mr Leung, the Plaintiffs took out the Amendment Summons inserting in the pleadings a declaration that Star Yield and Lau shall indemnify China Line and China International Cruise for any losses and damages arising under the aforesaid contracts.  Whilst unusual, there are a number of first instance authorities where indemnificatory relief was awarded: see McGregor on Damages (21^st Ed., 2020) at §10-033.

48.  In my view, the Defendants were at all times aware of the liability that China Line and China International Cruise could face if the Loan was not received.  Crucially, the Defendants continued to make a series of false post-contractual representations which persuaded China Line and China International Cruise to enter the Consulting Agreement and the MV Gemini Memorandum of Agreement.  For these reasons, I will grant a declaration of indemnity in favour of China Line and China International Cruise.

D.   CONCLUSIONS

49.  On the basis of the aforesaid, I will grant the following orders:

(1)  There be a declaration that the 1^st Defendant holds 4,050 shares of the 4^th Plaintiff on trust for and on behalf of the 2^nd Plaintiff.

(2)  There be a declaration that the 1^st Defendant holds 450 shares of the 4^th Plaintiff on trust for and on behalf of the 3^rd Plaintiff.

(3)  There be an order requiring the 1^st Defendant to deliver up or cause to be transferred the aforesaid 4,500 shares of the 4^th Plaintiff to the 2^nd and 3^rd Plaintiffs.

(4)  There be a declaration that the 1^st and 2^nd Defendants are joint and severally liable to the 1^st Plaintiff in the sum of US$1,000,000.00 (or the equivalent Hong Kong dollar amount).

(5)  The 1^st and 2^nd Defendants do pay and/or transfer to the 1^st Plaintiff the sum of US$1,000,000.00 (or the equivalent Hong Kong dollar amount).

(6)  The 1^st and 2^nd Defendants, whether acting by themselves, their servants and/or agents or otherwise, be restrained from disposing of or dealing with their assets to the amount of up to US$1,000,000.00 as set out in paragraph (5) until the same is paid over or transferred to the 1^st Plaintiff. 

(7)  The 1^st Defendant do pay the 1^st Plaintiff interest on the sum of US$ 1,000,000.00 (or its Hong Kong Dollar equivalent at the time of payment) at the best lending rate of HSBC in the Hong Kong Special Administrative Region from 12 January 2019 to the date of judgment and thereafter at judgment rate until payment.

(8)  There be a declaration that the 1^st and 2^nd Defendants shall indemnify the 1^st and 4^th Plaintiffs for any losses and/or damages, if any, whether incurred presently or consequential or contingent in nature, related to, occasioned by and/or arising from the Consulting Agreement between the 4^th Plaintiff and Galaxy Cruise Line Co. Ltd (銀河郵輪株式會社) (“Galaxy Line’) dated 27 November 2018 and the Memorandum of Agreement between Galaxy Line Co. Ltd.  on behalf of the 4^th Plaintiff and Jewel Owner Ltd for the sale and purchase of vessel “Passenger Ship Gemini” (IMO number 9000687) dated 27 December 2018.

50.  I also make an order nisi that the costs of this Action (including all costs previously reserved) be paid by the 1^st and 2^nd Defendants to the 1^st to 4^th Plaintiffs with such costs to be taxed if not agreed.  This order will become absolute within 14 days unless the parties apply to vary the same.

51.  Lastly, I thank Mr Leung for his assistance.