LI NGAN KWAN AND OTHERS v. GAO LI HUI AND OTHERS

HCA 933/2007

[2021] HKCFI 2878

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 933 OF 2007

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BETWEEN

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D E C I S I O N

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Contents		Paragraph
A.	INTRODUCTION	1
B.	BACKGROUND FACTS	9
C.	PROCEDURAL HISTORY	31
D.	LEGAL PRINCIPLES	38
E.	INORDINATE AND INEXCUSABLE DELAY OF THE PLAINTIFFS	50
F.	THE BIGGER PICTURE – NEW CLAIM MADE ON NEW BASES	70
G.	CONSTRUCTIVE TRUST AGAINST D1	97
H.	UNJUST ENRICHMENT AGAINST D1	103
I.	FRAUDULENT MISREPRESENTATION AGAINST D1	113
J.	NON EST FACTUM AGAINST GAO	119
K.	BREACH OF FIDUCIARY DUTIES AGAINST GAO	135
L.	DISHONEST ASSISTANCE AGAINST XU	147
M.	DISHONEST ASSISTANCE AGAINST THE FIRM	157
N.	CONSPIRACY AGAINST GAO, XU AND THE FIRM	167
O.	DECLARATORY RELIEFS RE 5 DOCUMENTS	173
P.	PREJUDICE ARISING OUT OF THE LATE AMENDMENTS	176
Q.	CONCLUSION	186

A. INTRODUCTION

1.  This is an extraordinary Amendment Summons for leave to amend a set of pre-CJR statement of claim (“SOC”) filed 13 years before the Summons. The relevant events happened about 14-16 years ago. Meanwhile, there has been over a decade of complete inaction by the Plaintiffs, with the case remaining in the pleadings stage, without even a reply being filed.

2.  Not only that but a judge has given an order for this case to be tried after another action (“Related Action”) and before the same judge. The Related Action has already been heard for 3 weeks in July 2008 and was adjourned. As of the date of this hearing, the trial has not been restored. There is a pending application by the plaintiff (same as the 1^st Plaintiff in this case) for amendment to the statement of claim and for trial de novo.

3.  The Plaintiffs’ claims in this case concern the shareholding of the 5^th defendant (“Excel Gainer”) which the 2^nd Plaintiff allegedly held on behalf of the 1^st Plaintiff. Excel Gainer held a property which was sold. The Plaintiffs claim that the net proceeds of sale (“Proceeds”) belonged to the 1^st Plaintiff as beneficial owner.

4.  The SOC sets out various claims against the 1^st to 3^rd Defendants who were allegedly involved in a fraudulent scheme to misappropriate the shareholding of Excel Gainer and the Proceeds. The claim against the 3^rd Defendant has since been discontinued.

5.  The Amendment Summons was taken out on 26 May 2020. The draft amended SOC (“DASOC”) puts forth causes of action against the 1^st and/or 2^nd Defendants in constructive trust, unjust enrichment, fraudulent misrepresentation, forgery, non est factum, breach of fiduciary duties, dishonest assistance and conspiracy.

6.  The 4^th Defendant (“the Firm”) was a firm of solicitors instructed by the 1^st to 3^rd Defendants to purportedly act for Excel Gainer to handle the sale of the property. The Plaintiffs sue the Firm in negligence and breach of duty of care. The DASOC changes the case to one of dishonest assistance and conspiracy to injure by unlawful means.

7.  The Plaintiffs confess that it is due to engagement of the new legal team that the DASOC is put forth. They contend that the amendments purport to clarify and refine the causes of action against the Defendants arising out of the same backdrop of facts. They do not constitute new causes of action. According to usual principles, those amendments ought to be allowed for the purpose of determining the real question in controversy between the parties. There was delay in this application due to the ill-health of the 1^st Plaintiff.

8.  Save for clerical amendments, the Defendants oppose the amendments on the common grounds of (1) inordinate and inexcusable delay, (2) expiry of limitation period and (3) prejudice that cannot be compensated by costs. Specifically, the Firm also oppose the proposed amendments as they are devoid of merits.

B. BACKGROUND FACTS

9.  The 1^st Plaintiff (“Li”) is the uncle of the 2^nd Plaintiff (“Sun”).

10.  On the Plaintiffs’ case, Li was at all material times, and remains, the sole shareholder of a group of companies, including Billion Houses International Holdings Limited (“BHIHL”), Billion Houses Investments (Properties) Limited (“BHIP”), Billion Houses Investments (HK) Limited (“BHIHK”) and Billion House Properties Limited (“BHP”).

11.  BHP is a company incorporated in Hong Kong. BHIHL, BHIP and BHIHK are all companies incorporated in the British Virgin Islands. BHIHL wholly owns BHIP and BHIHK. BHIP and BHIHK each in turn holds respectively 1% and 99% of the shareholding of BHP. The shareholding and directorship of this group of companies are in dispute in the Related Action, ie HCA 276/2007. It is the main action between Li and Gao (1^st Defendant in the present action), wherein Li claims that his interest in BHP was wrongfully transferred to Gao by way of forged board minutes of BHIHL.

12.  From November 1998 onwards, Gao commenced employment in a company controlled by Li. Thereafter, she was promoted to various posts in different companies also controlled by Li, including BHP as well as Grand View Hotel (Shenzhen) Co. Ltd (“the Hotel”). The 2^nd Defendant (“Xu”) was the Financial Manager of the Hotel, and worked closely with Gao.

13.  Li claims that Gao owed fiduciary duties to him personally, as manager of part of Li’s business (including the Hotel), BHP and its assets. Gao undertook to act on behalf of Li in relation to BHP and its assets and Li’s interests in respect of it, in circumstances which gave rise to a relationship of trust and confidence.

14.  On 9 June 2000, BHP purchased the subject property at Unit 09 on the 17^th Floor of the Office Tower, Convention Plaza, No. 1 Harbour Road, Hong Kong (“the Premises”) for HK$11.5 million, funded partly by Li, and partly with a bank loan secured by a first charge. Li was the guarantor.. The Plaintiffs’ pleaded case is (and has always been) that the Premises were purchased for and on behalf of Li, albeit held by BHP.

15.  From November 2002 onwards, Li began to suffer from health problems. He had a kidney transplant in December 2002. He relied on Gao to manage his business while he had medical treatment.

16.  In around early 2004, Li gave instructions to effect a spin-off of the Premises from BHP, such that the Premises would be held by a separate company to be managed by Sun. Therefore, Gao, with the assistance of Mr Loong Bing Kwan (a solicitor and partner of Messrs Loong & Yeung) (“Loong”) procured, amongst others, the acquisition of Excel Gainer, the transfer of its only share to Sun (“Excel Gainer Share”), and the appointment of Sun as the sole director of the same.

17.  During this time, a purported Declaration of Trust dated 17 May 2004 in English (“Declaration of Trust”) was purportedly signed by Sun, in circumstances where he did not understand English and without interpretation to him. The Declaration of Trust purported to show that the Excel Gainer Share held by Sun was beneficially owned by Gao.

18.  Sun now claims that he is unable to recall if he had signed the Declaration of Trust. Insofar as he had signed, it was procured by the misrepresentation of Gao that (i) Li had instructed Sun to sign the Documents[1] so as to effect transfer of the Excel Gainer Share to him to hold on trust for Li; and (ii) the Documents were for the purpose of protecting Li’s beneficial interest in Excel Gainer (“Fraudulent Misrepresentation”). Insofar as he had not signed it, it was forged by or the forgery was procured by Gao (“DoT Forgery Claim”).

19.  The Declaration of Trust was not stamped until 12 May 2006 with penalty imposed by the Collector of Stamp Duty.

20.  After Excel Gainer had been set up, Li instructed Gao to cause the sale of the Premises from BHP to Excel Gainer at a consideration of $10.5 million.

21.  In April 2006, pursuant to Li’s instructions (but without knowing about the Declaration of Trust), Excel Gainer sold the Premises for the agreed price of HK$16 million. YL Yeung & Co (“YL Yeung”), a firm of solicitors, was instructed to act for Excel Gainer in respect of the sale.

22.  On dates unknown to the Plaintiffs, Gao caused and procured a purported Instrument of Transfer dated 12 May 2006 (“Instrument of Transfer”) to be created, supposedly showing that Sun’s Excel Gainer Share had been transferred to her. Sun had never signed such document. There was also a purported letter of resignation dated 14 May 2006 (“Letter of Resignation”) created by Gao showing Sun’s purported resignation as a director of Excel Gainer. Again, he had never signed such letter. Based on the purported resignation, Gao and/or Xu filed a purported Form D2A (“Form D2A”) with the Companies Registry showing Sun’s resignation, and their purported appointment as directors.

23.  Thereafter, Gao, Xu and D3 prepared purported Board minutes of Excel Gainer (“Board Minutes”) resolving, amongst others, to instruct the Firm as Excel Gainer’s solicitors for the sale in place of YL Yeung.

24.  From 12 May 2006 onwards, the Defendants (including the Firm) exchanged correspondence with YL Yeung. Amongst others, by a letter dated 26 May 2006 from YL Yeung, express notice was given to the Firm about the alleged fraud against Gao, and the fact that the Instrument of Transfer was a forgery. Despite that, YL Yeung later released the deposit in the sum of HK$1.6 million (“Deposit”) to the Firm, who later also received the balance of the purchase price from the purchaser.

25.  Upon completion of the sale and purchase of the Premises, the Proceeds were not paid to Excel Gainer but other persons. Gao and Xu vanished without trace.

26.  Police reports were made by the Plaintiffs about, amongst others, Gao and Xu’s fraudulent acts in May 2006.

27.  In February 2007, Li commenced the Related Action against, Gao and BHIHL which ultimately held the Hotel.

28.  The present action was commenced on 8 May 2007. The SOC claims that Gao and Xu were constructive trustees of the Proceeds, seeks damages against them for fraud, fraudulent misrepresentation and conversion and that 2 documents (the Declaration of Trust and Instrument of Transfer) be declared null and void. The Plaintiffs also claim that the Firm was negligent and in breach of duty and that it was the constructive trustee of the Proceeds.

29.  In the DASOC, the Plaintiffs seek very substantial amendments:

(1) As against Gao, causes in constructive trust, unjust enrichment, fraudulent misrepresentation, forgery, non est factum, breach of fiduciary duties and conspiracy.

(2) As against Xu, the Plaintiffs’ claim is in dishonest assistance of Gao’s breach of fiduciary duties and conspiracy.

(3) The claim against the Firm is entirely deleted and replaced with a claim in dishonest assistance of Gao’s breach of fiduciary duties and conspiracy to injure the Plaintiffs by unlawful means.

30.  Same for the amendments in respect of non est factum, the Plaintiffs admit that the proposed amended causes are beyond the limitation period. However, the Plaintiffs submit that those causes arise out of the same or substantially the same facts as in the SOC.

C. PROCEDURAL HISTORY

31.  By an Amended Order of DHCJ To dated 10 January 2008, this action was ordered to be heard on the same list and before the same judge as the Related Action.

32.  On 2 July 2008, the trial for the Related Action commenced before DHCJ To. It lasted for 3 weeks but was adjourned on 29 July 2008 for the summer vacation. Post-hearing, this Court learnt that the application to restore was only made on 26 July 2018. On 12 July 2021, DHCJ To ordered a trial de novo.

33.  For a period of time from 2008 till 2018, Li suffered from various illnesses and was in and out of hospital. They allegedly rendered him unable to properly give instructions to prosecute the present action or to restore the Related Action.

34.  After 10 years of inaction, on 10 July 2018, the Plaintiffs (acting in person) filed their Notice of Intention to Proceed in this action. On 26 July 2018, they further issued a case management summons.

35.  The Plaintiffs took another year to engage a new legal team to act for them in mid-2019. Upon legal advice, they took various steps for the continuation of the present action, including taking out a summons to compel Gao and Xu to provide proper addresses for service within the jurisdiction, in lieu of their PRC addresses in their Notices to Act in Person.

36.  On 30 October 2019, KB Chau came on the record as solicitors for Gao and Xu.

37.  The Plaintiffs took out this Amendment Summons on 26 May 2020. By letters in June 2020, Gao, Xu and the Firm (all through their solicitors) objected to the Amendment Summons.

D. LEGAL PRINCIPLES

D1. General principles on amendment of pleadings

38.  The Court may at any stage of the proceedings allow amendment to a pleading on terms as to costs or otherwise as may be just. The Court may do so even where an application for amendment is made after any relevant period of limitation current at the date of issue of the writ has expired, if it thinks it just to do so. See Order 20, rule 5(1) and (2).

39.  An amendment may be allowed under rule 5(2) notwithstanding that the effect of the amendment will be to add or substitute a new cause of action if the new cause of action arises out of the same facts or substantially the same facts as a cause of action in respect of which relief has already been claimed in the action by the party applying for leave to make the amendment: Order 20, rule 5(5).

40.  The principles governing amendment of pleadings are well-established and have been set out in Shenzhen Futaihong Precision Industry Co Ltd v BYD Company Ltd (unrep., HCA 2114/2007, 18 July 2016)[2], per Ng J (“Shenzhen Futaihong (CFI)”) at §15:

(1) It is a guiding principle of cardinal importance on the question of amendment that generally speaking, all such amendments ought to be made for the purpose of determining the real question in controversy between the parties to any proceedings or of correcting any defect or error in any proceedings.

(2) Leave is readily granted to amend before trial unless it can be shown that the new claim based on the proposed amendment is bound to fail. While the court is entitled to have regard to the merits of the case, it should only do so when the merits are readily apparent, and are so apparent as not to require prolonged investigation.

(3) If the proposed amendments are bound to fail, no leave to amend should be granted. In this regard, the court will take the applicant’s proposed pleaded case to the highest.

(4) Absent any real prejudice, an application for amendment, albeit late, must be decided upon the general principle that a court of law seeks to adjudicate on the real issues and disputes between the parties and, if possible, technical and procedural rules should not stand in the way of allowing the parties to raise their real claims or defences before the court for adjudication.

(5) Where prejudice is claimed, the burden is on the party opposing the amendment to show prejudice. There is no injustice to the opposing party if he can be compensated by appropriate orders as to costs.

(6) Lastly, in giving effect to the underlying objectives of the Rules of the High Court, the court shall always recognize that the primary aim in exercising the powers of the court is to “secure the just resolution of disputes in accordance with the substantive rights of the parties”.

41.  An application to amend will be refused if it is clear that the proposed amendment has no real prospect of success. The test to be applied is the same as that for summary judgment under Order 14, RHC. The applicant has to have a case which is better than merely arguable. The court may reject an amendment seeking to raise a version of facts which is inherently implausible, self-contradictory or is not supported by contemporaneous documentation. See Quah Su-Ling v Goldman Sachs International [2015] EWHC 759 (Comm), §36, Carr J.

D2. Principles on amendments raising limitation issues

42.  The starting point for amendments which concern issues of limitation is section 35 of the Limitation Ordinance (Cap 347) (“LO”). Section 35(3) provides that the Court shall not allow new claims to be made in the course of any action after the expiry of a limitation period. However, section 35(5) and (6) of the LO provide that:

“rules of court may provide for allowing a new claim to which subsection (3) applies to be made as there mentioned, but only if…

… in the case of a claim involving a new cause of action, if the new cause of action arises out of the same facts or substantially the same facts as a cause of action in respect of which relief has already been claimed in the action by the party applying for leave to make the amendment; …”

43.  In Shenzhen Futaihong (CFI) at §16, Ng J adopted the “three-stage” test in considering proposed amendments where there are limitation issues (affirmed by the Court of Appeal at §74):

(1) Stage 1: is it reasonably arguable that the opposed amendments are outside the applicable limitation period? If not, then the amendments fall to be considered in accordance with general principles governing amendment applications.

(2) Stage 2: If the answer to (1) is yes, do the proposed amendments seek to add or substitute a “new cause of action”? If not, then again the amendments fall to be considered in accordance with general principles.

(3) Stage 3: If the answer to (2) is yes, does the new cause of action arise out of the same or substantially the same facts as are already in issue in the existing claim? If not, the amendments cannot be allowed. If yes, then the court retains a discretion to allow or refuse the amendments in accordance with general principles.”

44.  As regards Stage 1, the burden is on the applicant to show that the opposing party does not have a reasonably arguable limitation defence: Shenzhen Futaihong (CFI) at §17; Delco Participation BV v HWH Holdings Ltd [2019] HKCFI 3136 per Coleman J at §23.

45.  As regards Stage 2, in assessing whether the proposed amendments seek to add or substitute a “new cause of action”:

(1) A “cause of action” is “simply a factual situation the existence of which entitles one party to obtain from the court a remedy against another person”; it is not so much a label attaching to a claimant’s claim (eg “breach of statutory duty”), but it is a set of facts which entitles the plaintiff to relief. See Shenzhen Futaihong (CFI) at §§32-33; Shenzhen Futaihong (CA) at §§81-84.

(2) It does not mean that no material fact could ever be added. A “new cause of action” means “a new claim made on a new basis”: Arta Properties Ltd v Li Fu Yat Tso, HCA 2741/1998, 5 January 2007, §22, Recorder Paul Shieh SC.

46.  As regards Stage 3, Shenzhen Futaihong (CFI) at §§50, 53-56 explains as follows:

(1) The rationale of the test in Stage 3 is to avoid placing a defendant in a position where he will be obliged, after the expiration of the limitation period, to investigate facts and obtain evidence of matters completely outside the ambit of and unrelated to the facts which he could reasonably assume to have investigated for the purpose of defending the unamended claim.

(2) The words “arising out of the same facts or substantially the same facts as are already in issue in the existing claim” are not to be narrowly construed, but they should be given a “broad and liberal interpretation” to attain the object of the rules. “Same or substantially the same” is not synonymous with “similar”: Shenzhen Futaihong (CA), §86.

(3) The greater part of the facts in support of the new cause of action which is sought to be introduced by the amendment must already have been pleaded in support of the original cause of action.

(4) The material facts supporting the new cause of action need not be identical to or be a complete overlap with those supporting the originally pleaded cause of action. Thus, the originally pleaded cause of action may rely on material facts A, B and C, and the new cause of action may rely on material facts A, B, C and D. The addition of new fact D does not necessarily mean that the facts in support of the new cause of action are not substantially the same as those supporting the old cause of action. That must depend on the nature of the causes of action concerned and the nature and importance of the new facts that have been pleaded. There can be no hard and fast rule.

(5) Whether the new cause of action arose substantially from the same facts as originally pleaded is sometimes a matter of impression or involves value judgment. The Court must be guided by a large measure of common sense.

47.  Shenzhen Futaihong (CA), §86, added that:

(1) Whilst in borderline cases, the answer to Stage 3 is or may be substantially a matter of impression, in others, it must be a question of analysis.

(2) It is necessary to consider the extent to which the defendants would be required to embark upon an investigation of facts which they would not have been concerned to investigate. At Stage 3 the court is concerned at a much less abstract level than Stage 2; it is a matter of considering the whole range of facts which are likely to be adduced at trial.

(3) In considering what the relevant facts are in the original pleading, a material consideration is the factual matters raised in the defence: see Berezovsky v Abramovich §73 and Goode v Martin [2002] 1 WLR 1828 where the Court of Appeal interpreted CPR 17.4(2) [13] so as to produce a just result where an amendment involved the introduction of no new facts. There the facts in question had been raised in the defence, though not in the original statement of claim.

48.  Where it is sought to add allegations of wrongdoing which is intentional, the amendment cannot be categorized as a technicality. The critical question is the extent to which the facts on which the new cause of action is based depart from those already pleaded (and not the seriousness of the new allegation). To allege that an injury is caused intentionally is to add a new allegation of fact which gives the allegations of fact as a whole a substantially different character. See Paragron Finance Plc v DB Thakerar & Co [1999] 1 All ER 400, at 420 c-e (CA).

49.  There is no scope for any form of residual discretion to grant leave to introduce a time-barred new cause of action which does not satisfy the Stage 3 test: Arta Properties, §18.

E. INORDINATE AND INEXCUSABLE DELAY OF THE PLAINTIFFS

50.  Coming to Court for substantial amendments to the SOC 13 years since its filing is shockingly late. The Plaintiffs’ explanations for the delay is the ill health of Li; and that Sun could not have proceeded alone as Li’s input was important.

51.  At the 2^nd day of this hearing, Li produced some medical records without a proper medical report. Ms Tong and Ms So, counsel for the Plaintiffs have summarized Li’s illnesses in a table, covering 10 years from July 2008 to July 2018. Li claims that he issued the Notices of Intention to Proceed in July 2018 for this action and the Related Action as soon as he “felt healthy enough to do so”.

52.  This is an unacceptable mode of producing medical evidence, as Li is not talking just about an isolated incident of being absent from court due to urgent illness, but the core reason for his 13-year delay. Li’s conduct deprived the other parties of the opportunity to investigate the truth as to his medical condition. The medical evidence ought to be rejected for such reasons alone.

53.  Likewise, the 1^st and 2^nd Defendants’ Summons in response, seeking to produce emails of Li disclosed in the Related Action, is not acceptable as there is no opportunity for the Plaintiffs to reply to it. I dismiss that Summons.

54.  In any case, having considered Li’s medical evidence, I agree with defence counsel that Li’s explanations for the delay in this application are unacceptable for the following reasons.

55.  Firstly, none of the medical records state that Li’s illnesses affected his cognitive ability or otherwise prevented him from conducting litigation. Li-6^{th [3]} in support of this Amendment Summons did not even assert that he was medically impaired from 2008-2018.

56.  Secondly, although there had been lengthy periods of hospitalization (eg from 19 October 2010 to 13 May 2011 for 206 days), or Li was in and out of hospital in 2015, there was no medical evidence of hospitalization for several lengthy periods:

(1) From August 2008 to July 2010, ie a period of 2 years.

(2) From 13 May 2011 to 6 March 2015, ie a period of almost 4 years; and

(3) From August 2015 to April 2018, ie a period of about 2½ years.

57.  Li’s subjective feeling that he was not “physically well enough” or “healthy enough” to pursue these proceedings could not salvage the lack of objective medical evidence as to his health or cognitive ability.

58.  Li was able to file a Notice of Intention to Proceed in this action on 10 July 2018. In addition, a medical record showed that as at 20 July 2018, Li insisted on being discharged on the ground that he must go to Beijing to attend to a matter. (患者表示今日有要事去北京辦事，一定要出院。)

59.  Despite his ill-health, Li, on his own case, had been travelling between Mainland China and Hong Kong. His failure to provide any travel records between those 10 years rendered the sporadic hospitalization and failure to medically account for certain long periods even more incredible.

60.  Thirdly, one must not forget that the Plaintiffs had had legal representatives to assist them until at least mid-2015. Li did not say that no one else could possibly have assisted him in giving instructions to his lawyers.

61.  Fourthly, Sun has failed to give any explanation as to why there has been no progress in this action for years. Li seeks to explain that “it would not have been feasible (nor conducive to saving time and costs) for Sun to proceed with the claim alone without [Li’s] involvement, particularly as much of the background required [Li’s] evidence and input”.

62.  This explanation is unacceptable because:

(1) The factual matters concerning the Fraudulent Misrepresentation were clearly within Sun’s personal knowledge and not Li’s. When Gao accompanied Sun to Hong Kong to sign documents prepared by Loong, there was no suggestion that Li was present.

(2) Whether or not the signature on the Declaration of Trust was forged was not a matter which required legal advice for Sun to ascertain.

(3) Sun, being a party to this action, was under an independent duty to prosecute it with expedition.

63.  Fifthly, it is important not to lose sight of the period before 2008. Li claimed that his ill health originated from operation on a major organ in 2002 and he suffered from various other medical problems from then onwards. However, he had been able to commence the Related Action and this action in 2007. He proceeded with the Related Action up to the time of trial until it was adjourned part-heard in July 2008.

64.  The Courts have constantly emphasized that a legal representative must not make very serious allegations (such as fraud) without cogent evidence in support. As a general rule, a party alleging fraud must do so at the earliest opportunity. If fraud is pleaded only at an advanced stage of the proceedings, the Court will inquire into the reason for the failure to plead the fraud when the action was launched and into the bona fides of the application and the charge of fraud: Heraeus Ltd v Chan Yun Mui & anor [2018] HKCFI 2721 at §§51-54, DHCJ Marlene Ng.

65.  Li has not explained why his proposed amendments could not have been put into his SOC back in 2007/2008 when he was actively prosecuting the Related Action. The inference must be that his then legal representatives did not consider that there was sufficiently cogent evidence to plead causes involving fraud and dishonesty then.

66.  Given his counsel’s present concession, it is plain that the proposed amendments arise due to fresh examination of the merits of the claim by fresh counsel. The proposed amendments are really afterthoughts. This is particularly egregious having regard to the proposed claims based on fraud and dishonesty.

67.  The question of Li’s ill-health aside, the delay has a negative impact on the Firm. Allegations of professional negligence (and now, dishonest assistance and conspiracy) are of such a character which common fairness requires should not be kept hanging over a defendant’s head a moment longer than is necessary. If such damaging charges are to be made, justice particularly demands that they should be disposed of with the minimum of delay: see Allen v Sir Alfred McAlpine & Sons Ltd [1968] 2 QB 229, at 253G-254A, 265G-266A and 275A-B (the delay was 6-7 years since issue of the writs); Beijing Tong Gang Da Sheng Trade Co Ltd v Allen & Overy (No 2) [2014] 3 HKLRD 292, §36, DHCJ Le Pichon.

68.  The present action has been hanging over the head of the Firm for 14 years. One partner Mr Sun had become bankrupt in 2017. The other, Mr Chan, is still a practicing solicitor in another firm. The present action will not come up for trial until after trial de novo of the Related Action and after further investigations arising from the belated amendments. There will be severe prejudice to Chan to have the action hanging over his head for yet another few years. That is something that cannot be compensated by costs.

69.  In summary, I am of the view that there has been inordinate and inexcusable delay in taking out the Amendment Summons. That is sufficient to dismiss the Amendment Summons.

F. THE BIGGER PICTURE – NEW CLAIM MADE ON NEW BASES

70.  Before I analyze the proposed amendments in detail with regard to the limitation period, one should look at the bigger picture as to:

F1. Change in bases of Li’s claim of beneficial ownership in the Premises;

F2. Contradictory stance of the Plaintiffs on forgery; and

F3. Fundamental change from unintentional wrongdoing to intentional wrongdoing.

71.  On analyses, the bigger picture reveals new claims that can be summarily dismissed due to inherent defects.

F1. Change in bases of Li’s claim of beneficial ownership in the Premises

72.  The SOC pleads that Li was, amongst others,

(1) The beneficial owner of all the issued capital of BHP (§1);

(2) The beneficial owner of all the issued share capital of Excel Gainer such that the Excel Gainer Share was held by Sun on trust for Li (§1);

(3) The beneficial owner of the Premises from 15 June 2004 to the date of its assignment to the purchaser on 17 July 2006 (§1);

(4) It was Li who “purchased” the Premises at $11.5 million registered in the name of BHP. Li injected his own money of $4.2 million into BHP for part of the purchase price; and the balance was financed by a first charge on the Premises and secured by the personal guarantee of of Li to the extent of $7.8 million (§6); and

(5) It was upon Li’s instructions that the Premises were transferred from BHP to Excel Gainer (§9).

73.  In layman terms, there was a transfer of an asset from Li’s left pocket to right pocket. Sun was supposed to hold the beneficial interest in the asset on trust for Li but somehow, due to Gao’s fraud, the beneficial interest was lost.

74.  But the DASOC pleads a different trust:

(1) The plea that Li was the beneficial owner of BHP is deleted.

(2) BHP was part of a BVI corporate web. Li does not assert that he was a beneficial owner of any of these BVI companies.

(3) Li was no longer the “purchaser” of the Premises but BHP was. Li contributed $4.2 million towards the purchase price through BHP, with a mortgage arranged (not paid) by him and a personal guarantee provided by him. BHP held the Premises on resulting trust for Li as the beneficial owner.

(4) The trust was thus with BHP as resulting trustee or constructive trustee.

75.  Li’s claim is for the Proceeds, not eg loss in value of the Excel Gainer Share. The Court queries whether Li’s claim is in reflective loss in respect of an asset held in the name of a limited company.

76.  Lo Man Yau v Chiu Sung Fai & anor [2018] HKCA 387 concerned a property held by and in the name of a limited company but the purchase price partly came from the funds provided by its shareholder. The Court of Appeal approved of the legal principles governing how a resulting trust may arise laid down in the judgment of Madam Recorder Linda Chan, SC (as she then was) in Re Fortune King Trading Limited, HCCW 432/2012, unreported, 19 May 2017, at §§24-26 and 31:

(1) It is axiomatic that a company is in its own right a legal person having a separate and distinct identity from its shareholders. Therefore, as a general rule, a company does not hold property as an agent or trustee for its shareholder. Put differently, as a general rule, a shareholder has no legal or equitable interest in the company’s property, as opposed to a right to share in the profits of its business and to a distribution of any surplus on liquidation.

(2) It follows that when the purchase of a property is made in the name of a company, the starting point is that the purchase was intended to vest both the legal and beneficial interest in the company. This is true even if the funds for the purchase are provided by a shareholder.

(3) Both (1) and (2) are general propositions. Combined together, they give rise to a normal, but rebuttable, inference that the beneficial interest of the property acquired in the name of the company with funds provided by its shareholder was intended to pass to the company. When the shareholder claims that by providing the funds, the equitable interest in the property was intended to be vested in him personally by way of a resulting trust, he bears the burden to rebut the inference by proving that the legal interest and the equitable interest of the property were so vested in the company and him separately.

(4) The time to take stock of the respective interest taken by the company and the shareholder in the property is the time of its acquisition. The focus is on the parties’ intention at the time of purchase: whether the parties intended to vest the beneficial interest of the property in the shareholder as the provider of the funds, having regard to all the circumstances.”

77.  Applying Lo Man Yau, the DASOC is silent as to:

(1) Who of BHP had formed a common intention with Li at the time of the acquisition that beneficial interest in the Premises would vest in Li?

(2) How was it possible, not being a shareholder or director of BHP, for Li to give instructions to transfer the Premises to Excel Gainer?

(3) If there had been fraud by Gao as regards the Proceeds, how was it possible for Li to sue Gao directly without BHP (a trustee) being a party to the present proceedings?

(4) If Li contributed only part of the purchase price without alleging that he had repaid the mortgage, how is it possible for him to claim 100% of the Proceeds?

(5) How would Gao’s management of BHP (not owned by Li) give rise to fiduciary duties to Li?

78.  One can see from the amendments that Li’s case on beneficial ownership of the Premises is a new claim on a new and unsustainable basis: Arta Properties. Li has no locus to complain. The new claim is liable to be stuck out. Section F1 applies to all the proposed amended causes of action.

F2. Contradictory stance of the Plaintiffs on forgery

79.  The SOC pleads that Gao procured Sun to sign the Declaration of Trust, which Sun did. The DASOC pleads that Sun cannot now remember whether he signed the Declaration of Trust or not. Insofar as Sun had signed, he relies on non est factum due to Gao’s Fraudulent Misrepresentation. Insofar as Sun did not sign, he makes the DoT Forgery Claim. The Firm was given notice of the fraudulent acts of Gao, including how the Declaration of Trust had been obtained through her fraud, how the Instrument of Transfer was a forgery and that a report had been made to the police.

80.  I find that the DoT Forgery Claim is new and contradictory to the contemporaneous documents for the following reasons:

81.  Firstly, Sun had reported to the police on 18 May 2006 about the fraud of Gao (less than 2 years after the event), enclosing a copy of the Declaration of Trust. At that time, he had the opportunity to inspect the Declaration of Trust. Sun told the police that it was Gao who asked him to sign, although he did not know the contents. Gao only told him that Li had instructed him to sign. That was an admission by Sun that he had signed. And yet 16 years after the event, he puts forth a contradictory version of forgery.

82.  Secondly, YL Yeung, the Plaintiffs’ then solicitors in the sale of the Premises, admitted that Sun had signed the Declaration of Trust, as evidenced by a letter dated 26 May 2006 from YL Yeung to the Firm:

“Upon taking instruction from our client Mr Sun, we are instructed that the Declaration of Trust was signed by Mr Sun under the fraudulent representation made by Gao Li Hui that it was Mr Li Ngan Kwan’s instruction to sign the document. Mr Li Ngan Kwan is the actual and real beneficiary (sic) owner of the subject share in the Company [Excel Gainer]. It is well within the knowledge of Mr Sun that he holds the share as trustee for Mr Li Ngan Kwan but not Gao Li Hui. The most important features are Mr Sun could not read English, the said Declaration of Trust was not explained to him and not witnessed and not dated at the time of the signing by Mr Sun and it was only recently stamped.” (underline added)

83.  Thirdly, the SOC (§13) stated unequivocally that Sun had executed the Declaration of Trust.

84.  Fourthly, the Plaintiffs had made allegations of forgery in respect of 2 other Documents (the Instrument of Transfer and the Letter of Resignation) but not the Declaration of Trust. The inference is that the Plaintiffs have investigated and carefully considered their case, with the benefit of the then counsel’s advice and decided that the DoT Forgery Claim was not plausible at the time the SOC was filed.

85.  Fifthly, latest by August 2007, the Plaintiffs already had Gao’s forgery in mind and in fact had expert evidence relating to forgery. That was evidenced by the judgment of A Cheung J (as the Chief Justice then was) in the Related Action dated 22 August 2007, §§3-9.

86.  That judgment set aside the default judgment which Li had obtained against BHIHL. A Cheung J recited the facts that certain corporate documents were purportedly signed by Li. The net effect of those documents was the transfer of Li’s only share in BHIHL to Gao, the allotment of 9 further shares in BHIHL to Gao and the resignation of Li as the sole director of BHIHL. In his place, Gao and another person were appointed as directors. The documents were dated 16 February 2004, but according to Gao, they were in fact signed by Li on 13 February 2004 before Loong. It was Li’s case that he had never signed the subject documents, which were false. He had obtained an expert report which suggested that the purported signatures on the documents were forged. Li made serious allegations of fraud, misappropriation of assets belonging to the Hotel and other wrongdoings against Gao. Li also made serious allegations of fraud and collusion (in conjunction with Gao) against Loong. Gao denied that the documents were false and had also obtained her own expert report to suggest that the disputed signatures were genuine.

87.  Although the subject documents in A Cheung J’s judgment may not be the same as the pleaded documents in the present case, Gao’s mode of operation was similar in both cases. She allegedly used forgery and fraud to divest Li of his interest in the Hotel and the Premises.

88.  The 2 actions were commenced so close in time that Li (and his then lawyers) could not have missed the issue of forgery (if it did occur). The failure to plead the DoT Forgery Claim in the present case could not be explained away by the ill health of Li but was a deliberate decision.

89.  In summary, Sun had admitted 3 times (to the police, through YL Yeung and in the SOC) that he had signed the Declaration of Trust and made a deliberate decision not to plead forgery in the SOC. It is disingenuous for the Plaintiffs to suggest that the proposed pleas on forgery are not a drastic change of their factual case but “better describe the reality of what happened”, “better represent [Sun’s] recollection of events” or “better explain this unfortunate situation”. The plea of forgery should not be allowed. Section F3 applies to virtually all the proposed amended causes save for non est factum and unjust enrichment.

F3. Change from unintentional wrongdoing to intentional wrongdoing

90.  The SOC pleads a case of negligence and breach of duty against the Firm. This would require the Plaintiffs to show that the Firm fell below the standard of what a reasonably competent solicitor would do having regard to the standard normally adopted in his profession: Foshan Hua Da Industrial Co v Johnson, Stokes & Master (a firm) [1999] 1 HKLRD 418 at 425C-D. The standard was objective.

91.  The DASOC, however, pleads a case of dishonest assistance and conspiracy (against Xu and the Firm), both of which require dishonesty. Dishonesty has an objective standard but also a strong subjective element showing conscious impropriety (as opposed to negligence, carelessness or imprudence): Li Shiu To v Cheung Pik Ng (No 2) [2018] 1 HKLRD 934 at §§18(2), 46-52, 54-56, Au-Yeung J.

92.  It is well established that an amendment to make a new allegation of intentional wrongdoing by pleading fraud, fraudulent breach of trust or intentional breach of fiduciary duty where previously no intentional wrongdoing has been alleged constitutes the introduction of a new cause of action which cannot be categorised as a technicality: Paragon Finance plc [1999] 1 All ER 400, at 406c, 420d-h, Pill LJ.

93.  It would be contrary to common sense to hold that a claim based on allegations of negligence and incompetence on the part of a solicitor involve substantially the same facts as a claim based on allegations of fraud and dishonesty. There is no sharper dividing line than that which separates cases of fraud and dishonesty from cases of negligence and incompetence: Paragon Finance, at 418g-h, Millett LJ.

94.  For the reasons given in Section F3, the proposed amended causes action in dishonest assistance and conspiracy, made beyond limitation period, should be disallowed.

95.  In summary, the Plaintiffs should not be given leave to amend the SOC to make new claims on new bases. Section F, in itself, is sufficient to dismiss the Amendment Summons.

96.  In the Sections below, I shall analyse the proposed amendments to the causes of action one by one for the sake of completeness.

G. CONSTRUCTIVE TRUST AGAINST D1

97.  The Plaintiffs’ case is that receipt of the Proceeds by Gao and/or her nominees, and the purported transfer to her of the Excel Gainer Share were procured by fraud and forgery perpetrated on the Plaintiffs. Li as beneficial owner asserts a proprietary claim over the Proceeds and the Excel Gainer Share against Gao as a constructive trustee.

G1. Stage 1

98.  Section 20(1) of LO does not apply to constructive trusts or trustees arising out of knowing receipt of trust property or knowing assistance of breach of trust. Gao’s trust obligations arise as a direct consequence of the unlawful transaction impeached by the Plaintiffs: Timmerton Co Inc v Equity Trustee Ltd [2015] 1 HKLRD 247 at §§15-21, Chu JA. The Plaintiffs accept that the limitation period for such claim is 6 years and that Gao has a reasonably arguable limitation defence.

G2. Stage 2

99.  Having regard to the analyses in Sections F1 and F2, the proposed amendments give rise to a new claim made on new bases.

G3. Stage 3

100.  It is true, though, that the claim of constructive trust arising out of fraud in relation to the Proceeds has all along been pleaded in the SOC at §39. Gao and Xu were pleaded as persons intermeddling with the Proceeds. In addition, the following essential facts are in the SOC:

(1) Gao’s Fraudulent Misrepresentation (§11-13, SOC).

(2) Gao causing the Instrument of Transfer to be created (§§24-25, 26(b), SOC).

(3) The “scheme to defraud” the Plaintiffs and to deprive them of their entitlement to receive the Proceeds (§§26-27, SOC).

(4) The consequence that Gao was a constructive trustee of the Proceeds (§ 39, SOC) and should account (prayer 2(b)).

101.  The claim for constructive trust in relation to the Excel Gainer Share is not pleaded in the SOC. However, the essential facts (ie Gao’s fraudulent acts) giving rise to such trust are embodied in the first three items in the preceding paragraph. Additionally, §25, SOC pleads that “as at the date of the issue of the Writ of Summons herein, [Sun] remains the only shareholder of [Excel Gainer] holding 1 subscriber’s share thereof”.

102.  Whilst I agree with Ms Tong that the Plaintiffs are just pleading the legal consequence of a constructive trust arising from the originally pleaded fraudulent acts, the DoT Forgery Claim is a new cause. The substantially same facts in the SOC cannot cure the problems highlighted in Sections F1 and F2. The amendments, should be disallowed.

H. UNJUST ENRICHMENT AGAINST D1

H1. Stage 1

103.  The Plaintiffs accept that the limitation period for unjust enrichment is 6 years: Goff & Jones, The Law of Unjust Enrichment (9^th ed) at §§33-07 to 33-08; and that Gao has a reasonably arguable limitation defence for this cause of action.

H2. Stage 2

104.  The Plaintiffs also accept that unjust enrichment is strictly speaking a “new cause of action” not pleaded in the SOC.

H3. Stage 3

105.  In the SOC, it is pleaded that Gao claimed to YL Yeung that she was the only beneficial owner of Excel Gainer, and that neither Sun nor anyone had been authorized to receive the Proceeds. Gao gave instructions to the Firm as to payment of the Proceeds. However, the Proceeds were said to be paid to persons “other than Excel Gainer” (§§28 and 35, SOC.) There is no allegation that Gao had taken the Proceeds.

106.  The Plaintiffs invite the Court to infer, from facts in the preceding paragraph that Gao (and/or her associates) had received the Proceeds. §35 of the DASOC now makes this averment express.

107.  The unjust enrichment claim is predicated upon (i) enrichment by Gao in respect of the Proceeds and the shareholding of Excel Gainer Share; (ii) enrichment at the expense of the Plaintiffs; and (iii) an unjust factor, being the fraud of Gao.

108.  Ms Tong submits that the receipt by Gao of the Proceeds and Excel Gainer Share is not a matter in dispute in view of the Defences:

(1) The Firm (as solicitors acting for Gao, Xu and D3) received the Proceeds (§52 of Gao’s Defence).

(2) Xu received part of the Proceeds (§22(1)-(2) of the Firm’s Defence).

(3) Gao admitted that she had received the Excel Gainer Share and was the sole shareholder of Excel Gainer (§6(b) and 57 of Gao’s Defence).

109.  Therefore, Ms Tong submits that the amendments pertaining to the unjust enrichment claim will not require Gao to investigate facts outside the ambit of those which she would already have investigated for the purpose of the original pleas in the SOC. The substance of the Plaintiff’s complaint remains the same, namely, that Gao misappropriated the Proceeds and the Excel Gainer share to which she was not entitled.

110.  Mr Mak (and Mr Yau), counsel for the 1^st and 2^nd Defendants, submits that the Plaintiffs only identify the fact that Gao had provided no consideration as the unjust factor supporting this cause of action. He says that it is a defective plea because the usual consideration that fails is a promised counter-performance: A Restatement of the English Law of Unjust Enrichment (2012), at §15(2).

111.  With respect, this is a misreading of the DASOC. The DASOC is not saying that Gao promised to provide consideration but failed to do so in the end. Rather, it was Gao’s fraud which caused Gao to end up getting the Excel Gainer Share and the Proceeds without providing consideration. Mr Mak’s submission does not assist his case.

112.  I prefer the reasoning of Ms Tong. But for the delay and sections F1 and F2, leave to amend should be given.

I. FRAUDULENT MISREPRESENTATION AGAINST D1

I1. Stage 1

113.  The Plaintiffs accept that the relevant limitation period for a claim in misrepresentation is six years: section 4(1)(a) of the LO; and prima facie Gao would have an arguable defence based on limitation.

I2. Stage 2

114.  The Fraudulent Misrepresentation has always been pleaded (§§11 and 12, SOC). Related damages are sought in prayer §2(a).

115.  The DASOC relies on the same Fraudulent Misrepresentation to Sun but more particulars are given:

(1) As to falsity: that the representation was contrary to Li’s instructions that the Excel Gainer be held by Sun on behalf of Li and not anyone else. The Declaration of Trust did not protect Li’s interest but Gao was named as purported beneficiary thereon.

(2) Gao knew the representation was false in view of Li’s express instructions. She knew or must have known that Li did not intend for her to hold the Excel Gainer on trust for herself. Gao knew that Sun did not understand English and hence the contents of the Declaration of Trust. Gao knew that Sun would not have signed the Declaration of Trust if he had known that the effect was for Gao to have beneficial ownership in the Excel Gainer.

116.  This is not an entirely new claim but the particulars regarding Gao’s knowledge of Sun’s understanding of English and that Sun would not have signed formed a new basis. However, Section F1 applies.

I3. Stage 3

117.  The relevant amendments pertaining to the misrepresentation claim in the DASOC obviously arise out of the same facts or substantially the same facts as those originally pleaded at §§11-12 of the SOC.

118.  However, as pointed out by Mr Mak, the late plea has deprived Gao of the opportunity of preserving evidence as to Sun’s standard of English and his relationship with Gao which would or would not prove his trust in Gao. This is a prejudice that cannot be compensated by costs. In view of Section F1, I see no reason to grant leave to amend.

J. NON EST FACTUM AGAINST GAO

J1. Stage 1

119.  Ms Tong submits that the result of a successful plea of non est factum is that the relevant document/contract is null and void: see Lam San Keung v Beauti-Rich International Enterprise Ltd [2017] 6 HKC 558 at §100 (per DHCJ Saunders). The Court is simply asked to make a declaration regarding a state of affairs surrounding the execution (if any) of the Declaration of Trust: Zamir & Woolf, The Declaratory Judgment (4^th ed) at §1-02.

120.  Ms Tong submits that non est factum is not a “cause of action” which is subject to a limitation period, in that there is no date to be identified on which such cause of action “accrues”: see McGee on Limitation Periods, 8^th ed at §§3.005-3.006.

121.  Ms Tong also relies on Arif Anwar v Tony David Caperoe Giblett 2000 WL 1918580, 23 May 2000, wherein Deputy Judge John Randall QC at p 10 explained, in the context of the Bankruptcy Act 1914 and the Company Act 1948, that “if the transaction was simply void by statute, no question would arise of there being a limitation period in respect of a particular cause of action to have them set aside”.

122.  Without disrespect, the paragraph in McGee cited does not deal with non est factum. Arif Anwar deals with a statutory cause of action, which is not the case with non est factum here.

123.  Mr Mak refers to the case of Portman Building Society v Shanker Singh Dusangh, PTA 1998/7825/2, 4 May 1999, CA but it does not deal with non est factum either.

124.  Mr Mak also relies on Ming Shiu Chung v Ming Shiu Shum (2006) 9 HKCFAR 334 for the proposition that non est factum is a common law doctrine and submits that section 4(1)(a) of LO applies. Without disrespect, Ming Shiu Chung did not deal with the issue of limitation.

125.  Rather, Ming Shiu Chung held that where a person of full age and understanding has signed a document which purports to have legal effect, he is held to the document unless there is shown to be a recognized legal basis for concluding that their apparent consent has been in some way vitiated or that reliance on that document by some other person falls into some category of unconscionable conduct justifying relief in equity (§84). The vitiating factors at common law include fraud, mistake, misrepresentation, non est factum, duress, undue inference and lack of mental capacity. To disown a signed legal document, facts constituting the particular vitiating factor relied on must be pleaded and established by evidence (§87).

126.  McGee, §3.005 refers to the case of National Bank of Commerce v National Westminster Bank, the Financial Times, 18 March 1990, Webster J, which held that an action for a declaration did not become time-barred. The learned author questions the reasoning and goes on to say,

“It is not correct to say that an action for a declaration cannot become time-barred. The vital question for limitation purposes is as to the basis of the action. The remedy sought is relevant only in the context of equitable remedies, where s.36 of the Limitation Act 1980 may apply. The present action was an action founded on simple contract, and any action for a common law remedy became barred after six years. This includes an action for a declaration.” (underline added)

127.  I agree with the reasoning of McGee. In the present case establishment of the non est factum cannot be divorced from Gao’s Fraudulent Misrepresentation. The damage occurred, at the latest, in 2006 when Gao used the Declaration of Trust in pursuance of her fraudulent scheme to deprive Sun of his Excel Gainer Share and subsequently the Proceeds. The basis of the non est factum being fraud and misrepresentation, the 6-year limitation period applies.

J2. Stage 2

Ms Tong submits that there is no addition of any “new cause of action” when one looks at the substance rather than the form of what has already been pleaded in the SOC:

(1) Sun was a Mandarin speaker who was unable to read or understand English. That was the inference based on §§2(b) and 13.

(2) The Declaration of Trust was fundamentally different from what Sun believed he was signing (§11).

(3) Sun had not been careless in signing the Purported Declaration of Trust. That was the inference based on §§11 and 13.

(4) Sun “executed the Purported Declaration of Trust in English the contents of which had never been interpreted to him in Mandarin” (§13) clearly implies that Sun required such interpretation, because he could not properly understand the contents which were in English.

128.  I am unable to agree. It is plain that, applying Ming Shin Chung, the existing pleas in the SOC are insufficient to establish non est factum. What is added to the DASOC is a new plea that Sun did not understand but had not been careless. A new cause in non est factum is introduced. Section F1 also applies.

J3. Stage 3

129.  Ms Tong submits that Gao need not investigate facts and obtain evidence of matters outside the ambit of the facts which she would already have investigated to respond to the plea at §§11 and 13 of the SOC.

130.  I am unable to agree. By §25 of their defence filed on 6 October 2007. Gao and Xu pleaded that it was not known what the Plaintiffs’ case was, amongst others, as to:

(a) When and where the alleged representation took place?

(b) Whether the alleged representation was made orally or in writing?

(c) Whether it was the case that Sun had never attempted to make enquiries from Li as to whether the 1 subscriber’s share so transferred to Sun had been beneficially owned by Gao, but such attempts had failed?

(d) Whether it was Gao who had prepared the Declaration of Trust and if not, who had?

131.  The Plaintiffs did not file a reply or amend the SOC to plead non est factum properly. At that time Li was not yet medically impaired.

132.  The following are new facts in the DASOC that go beyond answering the queries raised in the Defence:

(1) That Sun had asked Gao the purpose of signing the Declaration of Trust (§11F(b), DASOC);

(2) That Sun had a basis to repose trust in Gao (§11F(e), DASOC);

(3) That Gao well knew that Sun did not understand English (§11B, DASOC), implying that Sun required interpretation;

(4) That it was Loong who prepared the Declaration of Trust (cf §11, DASOC); and

(5) The existence of other “Documents” of which the Declaration of Trust may or may not be part (§11A, DASOC).

133.  Back in 2007, the issues disclosed in the SOC and Gao and Xu’s Defence could not have alerted Gao and Xu to reasonably investigate into the matters in the preceding paragraph. Loong now becomes a potential witness. Gao would need to obtain evidence relating to Sun’s trust or lack of trust in her and Sun’s standard of English.

134.  For the reasons given in this Section, I decline to allow the amendments relating to non est factum.

K. BREACH OF FIDUCIARY DUTIES AGAINST GAO

135.  There are 5 limbs of breach of fiduciary duties in the DASOC:

(1) Forging or procuring the forgery of the Declaration of Trust and procured Sun to execute it without the consent of Li;

(2) Transfer of sums of money from BHP’s bank account to Gao’s bank account without the consent of Li;

(3) Procuring the transfer of the shareholding of Excel Gainer to herself without the consent of Li;

(4) Procuring the appointment of Xu and D3 as directors of Excel Gainer in place of Sun without the consent of Li; and

(5) Receiving the Proceeds.

K1. Stage 1

136.  The Plaintiffs accept that the relevant limitation period for this cause of action for breach of the fiduciary duties is 6 years: New China Hong Kong Group Ltd v Ernst & Young (unrep, HCCL 41/2004, 2/2005, 29 August 2008) at §151 (per Recorder Ambrose Ho SC). Prima facie, Gao has a reasonably arguable limitation defence.

K2. Stage 2

137.  The Plaintiffs accept that the plea of breach of fiduciary duties is a “new cause of action”, which has replaced the claim against Gao for “breach of duty of good faith and fidelity” as Li’s personal assistant.

K3. Stage 3

138.  Ms Tong submits that a substantial part of the facts in support of this new cause of action has already been pleaded in the SOC in the context of the claim for “breach of duty of good faith and fidelity”.

139.  The DoT Forgery Claim is, Ms Tong submits, only one alternative instance of wrongdoing arising out of Gao’s Fraud. Ms Tong submits that Gao need not investigate facts and obtain evidence outside the ambit of what she would already have to under the SOC.

140.  With respect, Ms Tong’s submission cannot be further from reality.

141.  In respect of the first limb of breach, forgery goes to the heart of Gao’s fraud. If forgery can be pursued now, expert handwriting evidence may be required.

142.  In respect of the second limb of breach,

(1) It is a completely new allegation which Gao could not have been expected to investigate under the SOC and her Defence.

(2) Since BHP was only Li’s trustee and Li does not claim beneficial interest in BHP, Li has no basis to complain that Gao transferred out BHP’s money to her. This breach has no prospect of success.

143.  In respect of the third and fourth limbs of breach, they are not new allegations. It is alleged in §§15A-15B of DASOC that Li was advised by Loong that the transfer of the Premises from BHP to Excel Gainer should be for a monetary consideration and that there should be records of payment from Excel Gainer to BHP; and Li relied on this advice under the mistaken belief that he was the beneficial owner of the Premises and the Excel Gainer Share. The advice of Loong is something that Gao newly needs to investigate.

144.  Li-7^th avers that such details go to the overall background and not the allegations against the Defendants as such. There is minimal prejudice even if there is some difficulty in retrieving the records. In any case, it is the Plaintiffs who have the burden of proof.

145.  With respect, such assertions show that the Plaintiffs do not have the genuine intention to pursue the assertions and act under the hope that the amendments would somehow escape the scrutiny of the Court. In any case, the facts are pleaded in support of a substantial breach of trust and cannot be said to be “minimal”.

146.  The fifth limb of breach is new but can in principle be allowed because it arises out of substantially the same facts as in the SOC. However, the difficulties set out in Section F1 apply to the 2^nd to 5^th limbs; whereas section F2 applies to the first limb. The amendments on breach of fiduciary duties should be disallowed.

L. DISHONEST ASSISTANCE AGAINST XU

L1. Stage 1

147.  The Plaintiffs accept that the relevant limitation period is six years: Shenzhen Futaihong (CFI), at §19, Ng J; prima facie, Xu (and the Firm) would have an arguable defence based on limitation.

L2. Stage 2

148.  The Plaintiffs accept that the amendments relating to dishonest assistance constitute a “new cause of action”. This must be right in new of Sections F1 and F3 above.

L3.  Stage 3

149.  Ms Tong submits that this cause of action against Xu arise out of the same facts or substantially the same facts in the SOC:

(1) Xu was a financial manager of the Hotel (§4(b)).

(2) “With a view to defrauding the Plaintiffs and depriving them of their legal entitlement to receive the Proceeds”, “the 1^st-3^rd Defendants, one or more of them, caused and procured”, amongst others, (i) the preparation and utterance of the Letter of Resignation (ii) utterance of the Declaration of Trust and Instrument of Transfer, (iii) the preparation by the Firm of Form D2A; and (iv) appointment of Xu as director (§26).

(3) “In furtherance of the scheme to defraud” the Plaintiffs, the 1^st-3^rd Defendants prepared the Board Minutes (§27).

(4) “The 1^st-3^rd Defendants or one or more of them gave specific instruction to [the Firm] for [the Firm] (sic) for the net balance of the purchase price to be paid to a person or person [sic] other than [Excel Gainer]” (§35).

150.  There is complete lack of averments as to Xu’s knowledge about Gao’s fraud or breach of fiduciary duties, or Xu’s own dishonesty. The facts in the SOC are consistent with innocence or inadvertence.

151.  In the DASOC (§37N), the Plaintiffs now claim that Xu well knew that Sun had not resigned and that Xu had not been properly appointed. Xu knowingly and dishonestly assisted Gao’s breach of fiduciary duties and/or Gao’s fraud. Xu consented to act as a director of Excel Gainer, prepared Form D2A, prepared the Board Minutes, executed the assignment as director of Excel Gainer for sale of the Premises, held herself out as a director of Excel Gainer and acted on the instructions of Gao to facilitate Gao’s breach of duties.

152.  The particulars of dishonesty are that:

(1) Xu had no experience acting as a director of a Hong Kong company holding property in Hong Kong. She “knew or must have known” that she had no reason to be appointed as a director of Excel Gainer but for the fraudulent scheme of Gao, with whom she worked closely; and

(2) Xu “knew or must have known” that she had not been properly appointed as a director of Excel Gainer in the absence of any relevant board or shareholders’ meeting appointing her as such.

153.  Ms Tong submits that these particulars of dishonesty could be inferred from §26 SOC. The additional pleaded fact that Xu acted on the instructions of Gao (§37N(f)) is arguably new, but this is not a material fact that is required to constitute the cause of action in dishonest assistance; it only forms part of the background.

154.  With respect, it is established law that fraud has to be pleaded and strictly proved and not just referred. The pleas in the DASOC, taken to the highest, cannot support a plea of dishonesty.

(1) There are no particulars of Xu’s knowledge that Gao was or would be acting in breach of fiduciary duties.

(2) There are no particulars of Xu’s knowledge of Gao’s fraud.

(3) There is nothing peculiar about a person being appointed as a director of a shell company, Excel Gainer, or to act as a director for a company that holds property in Hong Kong.

(4) An allegation that the defendant “knew or ought to have known” is not a clear and unequivocal allegation of actual knowledge and will not support a finding of dishonesty: Li Shu To v Cheung Pik Ng (No 2) [2018] 1 HKLRD 934, §§54-57, Au-Yeung J.

(5) The queries in Section F1 as to whether or not Li can claim against Gao for breach of fiduciary duties in respect of BHP apply.

155.  Although the appointment of Xu as a director has always been challenged in §26 of the SOC, the reason was lack of board minutes or shareholders’ meeting. Now, there would be a need to investigate new facts as to Xu’s knowledge and dishonest intent. Given the defective pleaded case in the DASOC, Xu would not even know what case to meet.

156.  The amendments as regards Xu for dishonest assistance should not be allowed.

M. DISHONEST ASSISTANCE AGAINST THE FIRM

157.  The DASOC pleads that the Firm knowingly and dishonestly assisted in the breaches of the fiduciary duties by Gao. The pleaded acts of assistance are:

(1) Acceptance of instructions to act as solicitors of Excel Gainer in the sale of the Premises without proper authority;

(2) Representing to YL Yeung that the Firm had authority to act as solicitors of Excel Gainer in the sale;

(3) Demanding YL Yeung to hand over the initial deposit received from the Purchaser;

(4) Rejecting YL Yeung’s proposal to pay the initial deposit into Court pending resolution of disputes over authority to act for Excel Gainer and beneficial ownership of Excel Gainer; and

(5) Paying the Proceeds to Gao and/or her nominees.

158.  The particulars of dishonesty are that the Firm was put on notice of Gao’s fraudulent acts by YL Yeung’s letter dated 26 May 2006. And yet the Firm refused to pay the initial deposit into Court and to make reasonable inquiries into the authority of Gao.

159.  The Plaintiffs accept that the limitation period is 6 years. In my view, quite apart from the fact that Section F3 applies, the dishonest assistance claim has no prospect of success. This is because there are no pleas that the Firm had knowledge of Gao’s fiduciary duties, or that she had breached or would breach them, or her Fraudulent Misrepresentation, or her forgery. There is no plea that the Firm had an intention to injure the Plaintiffs. The pleaded acts in assistance were consistent with innocence.

160.  Further, the particulars of dishonesty are manifestly insufficient to establish dishonesty on the part of the Firm.

161.  Firstly, the relevant knowledge to be established must be of facts and not of a disputed claim or allegation. See Li Shiu To v Cheung Pik Ng (No 2) at §67, citing Baden v Société Générale SA [1993] 1 WLR 509 where Peter Gibson J stated at §249 as follows:

“Further the relevant knowledge must be of facts and not of mere claims or allegations. This is established by the decision of the Court of Appeal in Carl Zeiss Stiftung v. Herbert Smith & Co. (No. 2) [1969] 2 Ch. 276. In that case the plaintiffs in an action in which they claimed that the property of the defendant belonged to them sought to make the solicitors to the defendant accountable for moneys received by the solicitors from the defendant for their fees and expenses. The basis of the claim against the solicitors was that they knew of all the matters averred by the plaintiffs in the action against the defendant and were therefore constructive trustees when they received moneys from the defendant for their fees. The Court of Appeal held that the solicitors had knowledge only of a disputed claim that the property of the defendant was held in trust for the plaintiffs and that they did not have knowledge that such property was in fact trust property; accordingly it was held that the solicitors having knowledge only of a doubtful equity lacked the requisite knowledge to be constructive trustees. Although the Carl Zeiss case was one relating to the ‘knowing receipt or dealing’ category of constructive trusteeship I can see no justification for treating the two categories of constructive trusteeship differently on this point. Each category requires knowledge of the trust. It seems to me also that for the ‘knowing assistance’ category a similar standard must apply to knowledge of the fraud and of the assistance. Again to differentiate between the different matters knowledge of which is requisite would not in my view be justified.” (underline added)

162.  In the present case, the situation faced by the Firm was a disputed claim between 2 camps (Li and Sun in one, Gao and Xu in the other). There is nothing to suggest that the Firm had knowledge of facts pointing to fraud of anyone.

163.  Secondly, solicitors are entitled to act on the basis of their client’s instructions being correct, without the need to assess the merits of a disputed claim against their clients: De Krassel v Chu Vincent [2010] 2 HKLRD 937 at §§53-54, Sakhrani J. The learned judge relied on the following authorities:

“53. Dankwerts LJ said in Carl Zeiss Stiftung v Herbert Smith & Co (No 2) [1969] 2 Ch 276, 293:

‘But claims are not the same things as facts ... What we have to deal with is the state of the defendant solicitors’ knowledge (actual or imputed) at the date they received payments of their costs and disbursement. At that date they cannot have had more than knowledge of the claims above mentioned. It was not possible for them to know whether they were well-founded or not. The claims depended upon most complicated facts still to be proved or disproved, and very difficult questions of German and English law. It is not a case where the West German foundation were holding property upon any express trust. They were denying the existence of any trust or any right to property in the assets claimed by the plaintiff. Why should the solicitors of the West German foundation assume anything against their clients?’

54. In Competitive Insurance Co Ltd v Davies Investments Ltd [1975] 1 WLR 1240, where it was sought to make a liquidator personally liable on the ground of constructive notice, Goff J (as he then was) said at p.1250:

‘True it is that he disposed of the trust property but he did so on the basis that there was no trust and that he was acting on nobody’s behalf except his principals. I do not see how this can be regarded as intermeddling in this context. The most that can be said, even if that be right, is that he was negligent which, in my judgment, is not sufficient.’ ” (underline added)

164.  Thirdly, Ms Tong refers to the imputation of “blind-eye knowledge” on the part of the Firm. However, blind-eye knowledge involves a deliberate decision not to inquire into matters which are obvious and specific. The suspicion must be firmly grounded and targeted on specific facts and not mere suspicion which may be no more than a vague feeling of unease: De Krassel at §§55-58. Here, the Plaintiff’s proposed amendments come nowhere near the necessary threshold for blind-eye knowledge.

165.  Fourthly, the pleaded facts in the DASOC support a case of innocence. Despite putting the Firm on notice of Gao’s alleged fraud, YL Yeung readily passed the Deposit to the Firm subject to the Firm’s usual undertaking to stakehold the same. The Firm instead of YL Yeung was permitted to receive the balance of the purchase price. As a result, the Firm was entitled to believe that the dispute between 2 camps of beneficial owners had been resolved. These were pleaded by the Firm, but no Reply has ever been filed.

166.  For the additional reasons given in this Section, the proposed amendments on dishonest assistance against the Firm should not be allowed.

N. CONSPIRACY AGAINST GAO, XU AND THE FIRM

167.  Four elements must be pleaded to sustain a case of conspiracy: Tempra Virginia Pido v Compass Technology Co Ltd [2010] 2 HKLRD 537, per Ma CJHC (as he then was) at §17:

(1) The agreement between two or more persons. The means of carrying out the agreement, whether lawful or unlawful, must be set out.

(2) The intention to injure the plaintiff, whether predominant (in the case of a lawful means conspiracy) or merely an intention to injure (in the case of an unlawful means conspiracy).

(3) The acts that were carried out pursuant to the agreement and the stated intention.

(4) The damage caused to the plaintiff.

168.  The alleged conspiracy was one to injure the Plaintiffs with unlawful means to be inferred from sections E (execution of documents to establish Excel Gainer), Section H (Gao’s forgery of documents in order to transfer Excel Gainer’s shareholding to herself) and Section I (instructions to the Firm in relation to sale of the Premise) of the DASOC.

169.  For Gao and Xu, Ms Tong submits that the essential facts underlying the conspiracy claim have already been pleaded in the SOC:

(1) There was a “scheme to defraud…and to deprive [the Plaintiffs] of their entitlement” involving Gao and Xu and that Gao and Xu acted “in furtherance” of such scheme (§27).

(2) Gao and Xu gave instructions to the Firm to act for Gao/Excel Gainer in relation to the sale of the Premises and to handle the Proceeds in accordance with their instructions (§§27(b), 29, 33, 35).

(3) The “unlawful acts” relied upon for the conspiracy claim are the same or substantially the same as the facts supporting the claims of (amongst others) fraud, breach of good faith/fidelity by Gao and breach of duty by the Firm as solicitors in the SOC.

170.  In respect of the Firm there are no further particulars save that the Plaintiffs rely on the facts in Sections E, H and I of DASOC.

171.  In my view, quite apart from the fact that Section F3 applies and limitation period has expired, the conspiracy claim has no prospect of success:

(1) It is far-fetched to suggest that the Court can infer an agreement or combination from the SOC. The furtherance of the scheme to defraud (§27, SOC) was in the context of diversion of the Proceeds and not in other aspects of Gao’s alleged fraud.

(2) It is likewise far-fetched to suggest that the Court can infer an intention to injure the Plaintiffs from the SOC.

(3) There are no particulars in the DASOC as to Xu or the Firm’s knowledge of Gao’s fraud or breach of fiduciary duties so as to conspire with her.

(4) There are no particulars in the DASOC as to Xu or the Firm’s knowledge of each other’s involvement in the fraud.

172.  It is incumbent on the Plaintiffs to provide adequate particulars. It is no answer to say that particulars can always be ordered. The conspiracy does not get off the ground even in the DASOC. Accordingly, the proposed amendments should not be allowed.

O. DECLARATORY RELIEFS RE 5 DOCUMENTS

173.  The Plaintiffs seek a declaration that 5 Documents, ie the Declaration of Trust, Instrument of Transfer, Letter of Resignation, Board Minutes and Form D2A, are null and void and of no legal effect.

174.  In my view, this relief stands and falls with the proposed amended causes of action analyzed above. Further, in relation to the Letter of Resignation, Board Minutes and Form D2A, no reliefs have been claimed in the SOC. The requirement in section 35(5) and (6) of LO is not met, in that the declaration (if it constituted a cause of action) in relation to these 3 Documents does not arise out of facts in respect of which “relief has already been claimed in the action”. No leave to amend shall be granted.

175.  In any case, one can hardly see the utility of declaring these 3 Documents void because the Plaintiffs are not seeking to set aside the sale of the Premises. If the Plaintiffs win on the substantive amended causes of action, Li can always re-appoint Sun as a director. There is no point in seeking a declaration. The Plaintiffs can also seek rectification or removal of record under section 42 of the Companies Ordinance, Cap 622, subject to any representation of the Companies Registrar.

P. PREJUDICE ARISING OUT OF THE LATE AMENDMENTS

176.  The burden is on the Defendants to show that they suffer real prejudice caused by the proposed amendments, which cannot be compensated by costs.

177.  The prejudice to Gao and Xu arising from the late amendments is clear and substantial:

(1) If the amendments to plead forgery is allowed, Gao and Xu would have to incur costs on handwriting experts. It is not clear whether it is possible to obtain sufficient samples of Sun’s signatures in 2004-2006 for the experts to compare. The Plaintiffs have not offered any assurance to the contrary.

(2) Instructions would have to be taken from Loong. It is not clear if he can still remember events 16 years ago or find the relevant documents.

(3) Gao is deprived of the chance to preserve documents that go towards disproving Sun’s trust on her and Sun’s English standard.

178.  The generalized assertion that memories must have grown fainter will generally not be sufficient prejudice. However, it is not essential in every case that there should be evidence of particular respects in which potential witnesses’ memories have faded. So long as there are primary facts from which inferences can properly be drawn, there is nothing wrong with doing so. See Tsang Foo Keung v Chu Jim Mi Jimmy, HCA 7140/1995, 12 July 2013, §80(5), G Lam J (as he then was).

179.  Ms Tong submits that such prejudice is not caused by the proposed amendments but rather, the lapse of time since the action was last in progress.

180.  I disagree. There is no suggestion, eg that apart from the pleaded documents, the fraud, conspiracy, dishonest assistance and breach of fiduciary duties are documented. One can anticipate from the pleaded facts that parties and witnesses will need to recall events and communications that occurred 16 years ago. The late raising of these amendments deprive the Defendants, through no fault of their own, the opportunity to preserve evidence when it was available or to record their version when memory was still fresh in their minds.

181.  The inability of one Defendant to produce relevant evidence due to lapse of time might have an impact on the defence of the other Defendants who are said to be co-tortfeasors.

182.  Insofar as the Firm is concerned, the prejudice to Chan cannot be compensated by costs. Further, the Firm has attempted to retrieve the file when acting for Excel Gainer but could not locate the original documents or the original Declaration of Trust. Enquires were made of Gao’s solicitors as to the whereabouts of the original Declaration of Trust but the reply was that they “might be kept” by Gao’s previous solicitors, Chiu Szeto & Cheng (“CSC”). Since the Firm was not CSC’s client, unless Gao procures the original documents from CSC, the Firm would be unable to instruct a handwriting expert to examine the authenticity of original Declaration of Trust and Instrument of Transfer.

183.  It is no answer for the Plaintiffs to say that the burden of establishing forgery is on the Plaintiffs. The Defendants are entitled to put forth their own evidence in rebuttal and discredit the Plaintiffs.

184.  Ms Tong submits that whether or not parties can get their hands on the original documents and/or have experts opine on copies can be matters resolved at a later stage. In my view, those are case management issues that cannot come before the consideration of whether or not amendments to the SOC should be disallowed on the ground of prejudice.

185.  I find that there is prejudice to the Defendants arising out of the amendments that cannot be compensated by costs.

Q. CONCLUSION

186.  The proposed amendments are way out of the limitation period. I reject Li’s explanation for the delay in making this application premised on his ill health. The bigger picture shows that Li has changed his bases of a claim to beneficial ownership and he might not have locus to claim without BHP being a party. He has also changed his case in trying to plead forgery now when Sun had made 3 previous admissions of signing the Declaration of Trust and the Plaintiffs have made a conscious decision of not making the DoT Forgery Claim in the SOC. The dishonest assistance and conspiracy claims are a change from unintentional tort to intentional tort way after the 6-year limitation period has expired. There is prejudice caused to the Defendants. For all the reasons given, I exercise any discretion to disallow the amendments, save for the clerical ones.

187.  I therefore dismiss the Summons. Costs follow the event and be paid by the Plaintiffs to the Defendants.

188.  I also dismiss the Summons of the 1^st and 2^nd Defendants to adduce Li’s emails, with no order as to costs.

189.  There shall be summary assessment of costs on the papers without an attendance. The Defendants do lodge and serve their respective updated statements of costs by 5 October 2021. The Plaintiffs do lodge and serve their grounds in opposition by 8 October 2021.

190.  I thank counsel for their industry and assistance to the Court.