CHINA METAL RECYCLING (HOLDINGS) LTD (IN LIQUIDATION) AND ANOTHER v. UBS AG AND ANOTHER

CAMP 223/2021

[2021] HKCA 1450

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

MISCELLANEOUS PROCEEDINGS NO 223 OF 2021

(ON AN INTENDED APPEAL FROM HCA NO 1348 OF 2019)

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J U D G M E N T

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Hon G Lam JA (giving the Judgment of the Court):

Introduction

1.  The plaintiffs in the action are China Metal Recycling (Holdings) Ltd (in liquidation) (“China Metal”) and its joint and several liquidators.  The 1^st defendant is UBS AG, an investment bank incorporated in Switzerland, with a branch in Hong Kong and registered in Hong Kong under the predecessor Companies Ordinance.  The 2^nd defendant is UBS Europe SE, a German company and a wholly‑owned subsidiary of UBS AG.  It is being sued as the successor of UBS Ltd, a company incorporated in the United Kingdom and also a wholly‑owned subsidiary of UBS AG.  UBS Ltd merged into UBS Europe SE on 1 March 2019.  For convenience the 2^nd defendant will continue to be referred to as “UBS Ltd” below.

2.  UBS Ltd has challenged the jurisdiction of the Hong Kong courts in this action.  The question in issue is whether or not the order made by a Master granting leave to issue and serve the writ in the action out of the jurisdiction on UBS Ltd should be set aside.  In her decision dated 8 April 2021 (“Decision”), Deputy High Court Judge Le Pichon (“Judge”) dismissed UBS Ltd’s challenge.[1]  In a further decision dated 8 June 2021, the Judge refused leave to appeal.[2] UBS Ltd has now applied to this Court for leave to appeal.

Background

3.  The background can be shortly stated.  For the purpose of an initial public offering (“IPO”), China Metal was incorporated in the Cayman Islands in 2007 to become the holding company for a business in scrap metal recycling and metal trading founded and run by Mr Chun Chi Wai (“Mr Chun”) and his wife.

4.  China Metal obtained pre‑IPO financing by issuing (i) 160 senior notes (“Notes”), in the denomination of US$500,000 each, totalling US$80 million, and (ii) authorised warrants (“Warrants”) representing the right to purchase China Metal’s shares at a nominal exercise price on the date of the IPO.  UBS AG provided financial advice and acted as China Metal’s exclusive placement agent in connection with the Notes and Warrants.

5.  The plaintiffs aver that UBS Ltd became a holder of 50 Notes with a total face value of US$25 million and 50 Warrants.  The plaintiffs’ primary case is that UBS Ltd acquired the Notes and Warrants for and on behalf of UBS AG.  Their alternative case is that UBS Ltd acquired the Notes and Warrants for itself.

6.  UBS AG was also one of the joint sponsors, the sole global coordinator, sole lead manager and sole bookrunner for China Metal’s IPO.  The IPO successfully took place on 22 June 2009, raising approximately HK$1.787 billion in total, or HK$1.685 billion net of expenses, for China Metal.

7.  The plaintiffs aver that these funds were obtained through Mr Chun’s fraudulent breach of his fiduciary duty, in that he made false disclosures to potential investors and The Stock Exchange of Hong Kong Limited (“HKEx”) in which, inter alia, China Metal’s revenues and profits were grossly overstated.

8.  The plaintiffs aver that UBS AG dishonestly participated in Mr Chun’s breach of duty by allowing Mr Chan to make the false disclosures and itself making related disclosures despite knowing or suspecting that they were not true, accurate or complete.

9.  UBS AG received fees and commissions connected with the IPO of about HK$79 million and also payments totalling about HK$244 million for the redemption of the Notes and settlement of the Warrants held for and on behalf of UBS AG.  The plaintiffs claim that UBS AG is liable to disgorge HK$323 million as profits received as a result of its dishonest assistance in Mr Chun’s breach of duties or as sums paid to UBS AG in breach of fiduciary duty in circumstances making it unconscionable for it to retain the money.  Based on the alternative case that UBS Ltd had acquired the Notes and Warrants in its own right, the plaintiffs claim that UBS Ltd is liable to disgorge the payments received under the Notes and Warrants on the basis that it would be unconscionable for it to retain them.

Decision of the Judge

10.  The plaintiffs obtained leave to serve out on UBS Ltd on the basis of Order 11 rule 1(1)(c) of the Rules of the High Court (Cap 4A), which permits service of proceedings out of Hong Kong on the ground that:

“ the claim is brought against a person duly served within or out of the jurisdiction and a person out of the jurisdiction is a necessary or proper party thereto.”

11.  There are essentially four points decided by the Judge in dismissing UBS Ltd’s jurisdictional challenge.  First, UBS Ltd contended before the Judge, relying on Queenston LLC v Serlen Ltd (HCA 585/2000, 27 April 2001), that for the purposes of rule 1(1)(c), a plaintiff has to show that it has a good arguable case on the merits against the defendant to be served outside the jurisdiction.  The Judge disagreed, and held that the test under rule 1(1)(c) is whether, supposing both defendants had been within the jurisdiction, they would have been proper parties to the action, and that the plaintiff need only show there is a serious issue to be tried on the merits with regard to the foreign defendant.[3]

12.  UBS Ltd also submitted, on the strength of three separate grounds, that the plaintiffs had failed to establish a good arguable case, or even a serious issue to be tried, on the merits as against UBS Ltd. The first point taken was that a claim based on knowing receipt must fail where the defendant’s receipt has occurred pursuant to a contract that remains valid and binding.  UBS Ltd relied on Criterion Properties plc v Stratford UK Properties LLC & others [2004] 1 WLR 1846 and other authorities following it.  The Judge distinguished these authorities and held that there being no authority on point, the question as applied to the plaintiffs’ claim in these proceedings is an arguable one.[4]

13.  Next, UBS Ltd argued that there was no arguable case that UBS Ltd possessed the requisite knowledge for the purpose of knowing receipt, since there was no case for attributing the knowledge or suspicions on the part of Alan Fung or UBS AG to UBS Ltd.  The Judge disagreed and held that there was a serious issue to be tried as she considered that the plaintiffs had shown a sufficient framework that could support a special rule of attribution but which could not properly be determined at the interlocutory stage.[5]

14.  UBS Ltd also submitted that the claim against it was clearly time‑barred.  The Judge again disagreed, holding that the plaintiffs’ contention that “fraud” in section 26(1)(a) of the Limitation Ordinance (Cap 347) extends to unconscionable conduct raises a serious issue not suitable for determination at this stage.[6]

The intended grounds of appeal

15.  On the intended appeal, UBS Ltd seeks to challenge each of these four points.  We shall discuss them in turn below for the purposes of the present application.

Whether the plaintiffs need to show a good arguable case on a cause of action against UBS Ltd

16.  In Queenston LLC v Serlen Ltd (HCA 7585/2000, 27 April 2001), Recorder Edward Chan SC stated (at pp 50-51):

“ … in my judgment, no matter how intimately the foreign defendant is involved in the subject matters of the Plaintiff’s claim against some existing and properly served defendants, it could hardly be said that the foreign defendant is a necessary or proper party unless the Plaintiff is able to show that he has a proper cause of action against the foreign defendant. In the context of an application for service of a specially endorsed writ out of jurisdiction, this would mean that if the Plaintiff could not show a good arguable case on his causes of action endorsed in the Statement of Claim, there should not be any leave to serve out of jurisdiction on this ground. Further, rule 4(2) expressly provides that no leave shall be granted unless it shall be made sufficiently to appear to the Court that the case is a proper one for service out of jurisdiction. It could hardly be proper to serve a defendant with a writ which disclosed no reasonable cause of action against him. In The Electric Furnace Co. v Selas Corporation of America [1987] RPC 23 at 32, Slade LJ said:

‘ It does seem to me that if the court takes the view that service out of the jurisdiction in a particular case is likely in practice to achieve no potential advantage whatsoever for the plaintiff, this would ordinarily not be a proper case for service out of the jurisdiction within the meaning of Order 11 rule 4(2).’

In the present case, the 2 causes of action which the Plaintiff would rely on against the 6th Defendant are: (a) fraudulent misrepresentation; and (b) breach of constructive trust in (i) dishonestly assisting the breach of trust; or (ii) knowingly or dishonestly receiving trust money paid out in breach of trust. For reasons I have given above when I consider the Plaintiff’s case under rules 1(1)(f) & (p), I do not think that on the Statement of Claim, the Plaintiff had made out a good arguable case on either of these claims and there was no serious issue to be tried on these claims either. In the circumstances, I see no point in granting leave to the Plaintiff to serve this specially endorsed writ out of jurisdiction against the 6^th Defendant. In my view, the Statement of Claim against the 6^th Defendant could be struck out on the ground that there was no reasonable cause of action against it.” (emphasis added)

17.  This passage was applied in Circuitronix LLC v Kingboard Chemical Holdings Ltd (HCA 1506/2014, 21 March 2017) at §§39-41 but without taking the reasoning any further.

18.  It should be noted that Queenston is a case in which a claim was actually made against the 6^th defendant there for breach of trust and knowing participation in the fraud perpetrated by the 4^th defendant on the plaintiff, and should not be taken out of that context.  Insofar as the passage quoted above suggests that there must be a cause of action against the foreign defendant before rule 1(1)(c) can be invoked, it seems to us inaccurate.  So far as being a necessary party is concerned, there are, for example, cases in trust or assignment where a person may need to be joined (if unwilling, as a defendant) in order to complete the plaintiff’s title to sue as equitable assignee or beneficial owner, even though there may not be a cause of action against that person: see Hong Kong Civil Procedure 2021, §§11/1/283 & 15/4/5.  As to whether a person out of the jurisdiction is a “proper party” to an action against a person who has been served within the jurisdiction, as Stone J held in Inchcape JDH Ltd v Baltrans Exhibition & Removal Ltd & another [1997] HKLRD 1278 applying Qatar Petroleum Producing Authority & another v Shell Internationale Petroleum Maatschappij NV & another [1983] 2 Lloyd’s Rep 35 at 41, the question depends on whether, supposing both parties were within the jurisdiction, they would have been proper parties to the action.  Thus, as this Court has stated in The Hong Kong Housing Authority v Hsin Yieh Architects & Associates Ltd [2006] 1 HKLRD 316 at §§18‑24, a person may be a necessary or proper party to an action even though the plaintiff has no underlying cause of action against him.

19.  Further, insofar as the above passage in Queenston suggests (as UBS Ltd contends) that under Order 11 rule 1(1)(c) the plaintiff is required to show a good arguable case on the merits against the defendant to be served outside the jurisdiction, it should not be adopted:

(1)  UBS Ltd’s argument seems to be that, since a plaintiff who relies on rule 1(1)(c) has to show a good arguable case that the foreign person is a necessary or proper party, this requires the plaintiff to show a good arguable case on the cause of action against that foreign person.  This does not follow as a matter of logic.  The plaintiff shows a good arguable case that the gateway of rule 1(1)(c) applies by showing — to that standard — why the foreign person is a necessary or proper party, such as because some common question of law or fact would arise (Order 15 rule 6(2)(b)(ii)).  There is no reason in principle to extrapolate this standard to the merits of the underlying claim against the defendant to be served.

(2)  The question of the standard of persuasion was considered by Stone J in Inchcape JDH Ltd v Baltrans Exhibition & Removal Ltd & another [1997] HKLRD 1278, who stated at pp 1285J‑1287C that consideration of the merits of the underlying claim against the foreign party did not form part of the question whether the case fell within rule 1(1)(c) and that the substantive merits remain to be assessed on the serious issue to be tried threshold.  As the Judge pointed out,[7] it is difficult to reconcile the above passage from Queenston with a preceding passage in which the Recorder expressly agreed with Stone J’s interpretation in Inchcape of what was meant by a necessary or proper party.

(3)  Further, UBS Ltd’s submission seems to us to be inconsistent with the general principle laid down in Seaconsar Far East Ltd v Bank Markazi Jomhouri Islami Iran [1994] 1 AC 438 and applied in numerous cases since including eg Altimo Holdings and Investment Ltd & others v Kyrgyz Mobil Tel Ltd & others [2012] 1 WLR 1804 at §71 and Fong Chak Kwan v Ascentic Ltd & others [2021] HKCA 1138 at §12, that in relation to the merits of the substantive claim against the defendant to be served out of the jurisdiction, the plaintiff needs only to show there is a serious issue to be tried.  To hold that different tests apply to the substantive merits depending on which gateway in Order 11 is invoked is likely to lead to confusion.

(4)  Seaconsar and the principle it laid down were cited by the Recorder in Queenston at p 20.  In the latter part of the passage quoted above, the Recorder actually referred to both good arguable case and serious issue to be tried.  It is doubtful that the Recorder had actually intended to single out “good arguable case” as the applicable standard in contradistinction to “serious issue to be tried”.

(5)  UBS Ltd’s proposition may also lead to anomalies in a case like the present one, where the plaintiff wishes to sue in the alternative a defendant (A) within the jurisdiction and another defendant (B) outside the jurisdiction on the ground that he is a necessary or proper party.  A may plead a defence such as that it merely acted as the agent of B, which raises a serious issue to be tried and cannot be struck out, but (if UBS Ltd’s contention is adopted) the plaintiff may fail to obtain leave to serve out on B because he can only show a serious issue to be tried but not a good arguable case against B on the merits.  We do not think this could be a result intended by the rules.

20.  In our judgment, Queenston should not be taken as authority that the plaintiff is required to show a good arguable case, as opposed to a serious issue to be tried, on the substantive merits against the party to be served out of the jurisdiction under rule 1(1)(c).  There is no reasonable prospect of showing that the Judge was erroneous in adopting the threshold of serious issue to be tried in assessing the substantive merits.

Receipt pursuant to valid and binding contract

21.  In Criterion, two directors of the claimant company, in order to oppose a possible takeover and deter the predator, signed a “poison pill” agreement on its behalf with a company which was in a limited partnership with the claimant, giving that partner the right to have its interest in the partnership bought out on favourable terms in certain events.  When the takeover did not occur, and the partner exercised its option to be bought out, the claimant brought proceedings to have the poison pill agreement set aside.  The main judgment was given by Lord Scott, but Lord Nicholls also delivered a short speech in which he said the following at §4:

“ … If a company (A) enters into an agreement with B under which B acquires benefits from A, A’s ability to recover these benefits from B depends essentially on whether the agreement is binding on A. If the directors of A were acting for an improper purpose when they entered into the agreement, A’s ability to have the agreement set aside depends upon the application of familiar principles of agency and company law. If, applying these principles, the agreement is found to be valid and is therefore not set aside, questions of ‘knowing receipt’ by B do not arise. So far as B is concerned there can be no question of A’s assets having been misapplied. B acquired the assets from A, the legal and beneficial owner of the assets, under a valid agreement made between him and A. …”

22.  Relying on this passage (particularly the first sentence), UBS Ltd submits that a knowing receipt claim must fail where the defendant’s receipt is pursuant to a valid and binding contract.  Here, since UBS Ltd received payments pursuant to the Notes and Warrants, which had been issued under agreements whose validity is not challenged, no claim for knowing receipt can arise.

23.  In our view, Criterion is a different case from the present one.  There, assets were to be passed pursuant to a contract entered into by directors on behalf of the company, and it was the act of entering into that contract that was said to be a breach of fiduciary duty itself.  Lord Nicholls’ speech has to be understood against that background. The context can also be seen from Lord Scott’s speech at §27:

“ This is neither a case of ‘knowing receipt’ nor one of ‘knowing assistance’. The word ‘receipt’ in the expression ‘knowing receipt’ refers to the receipt by one person from another of assets. A person who enters into a binding contract acquires contractual rights that are created by the contract. There may be a ‘receipt’ of assets when the contract is completed and the question whether there is ‘knowing receipt’ may become a relevant question at that stage. But until then there is simply an executory contract which may or may not be enforceable. The creation by the contract of contractual rights does not constitute a ‘receipt’ of assets in the sense that a ‘knowing receipt’ involves a receipt of assets. The question whether an executory contract is enforceable is quite different from the question whether assets of which there has been a ‘knowing receipt’ are recoverable from the recipient. To confuse these two questions is likely to lead, and in the present case has, in my opinion, led, to further confusion.”

24.  In contrast, here, the issuance of the Notes and Warrants to UBS Ltd was not the breach of duty. It is the IPO that is alleged to involve a breach of duty.  Specifically, it is said that Mr Chun acted in fraudulent breach of his fiduciary duties owed to China Metal and carried on the business of China Metal for a fraudulent purpose, by causing misrepresentations to be made in, and material disclosures to be omitted from, the IPO documentation in order to secure China Metal’s listing on HKEx and to attract investors.[8]  It is said that the fruits of that breach of duty and fraud — the IPO proceeds — were, after being received by China Metal, paid in part (to the tune of $244 million) to UBS Ltd to redeem the Notes and cash‑settle the Warrants.[9]

25.  The question that arises is whether money obtained via a separate breach of fiduciary duty and subsequently paid to a creditor pursuant to an obligation under a valid contract may be recovered from that creditor based on knowing receipt.  It may in our view be argued that in such a case, the unconscionability in retaining the money and the consequent obligation to repay it do not arise from any invalidity of the transaction under which the money was paid (as envisaged in Lord Nicholls’ passage in Criterion and similar cases), but from the separate breach of fiduciary duty through which the money was obtained in the first place and the creditor’s relevant knowledge when it received the money.  It seems to us at least arguable that the Criterion principle does not have the effect of precluding a claim against the creditor for knowing receipt even where the contract is not set aside.

26.  On behalf of the plaintiffs, Mr Manzoni SC posited the scenario where a company owes money to a creditor under a valid contract, and a director procures repayment to be made to that creditor but does so in breach of fiduciary duty because, for example, the company is insolvent.  The director can clearly be held liable for breach of fiduciary duty even though the contract with the creditor is not set aside: Byers v Chen Ningning [2021] UKPC 4, §93; Moulin Global Eyecare Holdings Ltd v Olivia Lee Sin Mei (2014) 17 HKCFAR 466, §57(4).  It seems to us at least arguable that a claim against the creditor for knowing receipt is likewise not precluded by the fact that his contract with the company has not been set aside.

27.  UBS Ltd also relies on Galleria (Hong Kong) Ltd v DBS Bank Ltd, Hong Kong Branch [2021] HKCA 611 at §§198‑202, the Court of Appeal’s decision in Akai Holdings Ltd v Thanakharn Kasikorn Thai Chamkat (Mahachon) [2010] 3 HKC 153 at §§35, 37, 248‑249, Maryo Development Ltd v Tsang Yau May & others (CACV 101/2015, 11 January 2016) at §§30‑31 and Hing Yip Holdings (Hong Kong) Ltd (in compulsory liquidation) v Cellmark China Ltd (in voluntary liquidation) [2021] HKCFI 1396 at §§228‑229.  These cases either applied or discussed the Criterion principle on the basis of their own facts and did not attempt to lay down any new or further principle.  They also seem to us quite different factually from the situation in the present case.  For example, in Akai Holdings Ltd, the very pledge by which the bank obtained security over the relevant Akai shares, which it subsequently sold, was under attack as an agreement entered into by Mr Ting without authority.  A claim against the bank for the proceeds of sale of the shares depended therefore on the validity of the pledge.  In Maryo Development Ltd, the sale by the third defendant of the jade pieces to the plaintiff was impugned as a fraud and the plaintiff’s directors were said to have acted in breach of their fiduciary duty in causing the price to be paid to the third defendant.  Thus Harris J said: “The right of a company to recover the price paid pursuant to an agreement, whose propriety is questioned, from the recipient is explained by Lord Nicholls and Lord Scott in Criterion …” (emphasis added).[10]  Hing Yip Holdings is a case where it was alleged that the sales of goods by the defendants to the plaintiff were part of a fraudulent scheme to utilise the plaintiff’s trade finance facilities.  After its liquidation the plaintiff claimed that the defendants were liable in knowing receipt of the money paid under that scheme on the basis that the transactions “were void and of no effect for want of authority”.[11]  In Galleria, as the Judge pointed out in her leave decision, the court had found that the plaintiff’s claims failed on the facts, and the comments on Criterion were therefore obiter.  In our respectful opinion, these additional cases do not show that the plaintiffs’ claim against UBS Ltd is unarguable for the reason submitted.

28.  In conclusion, there is in our view no reasonable prospect of success in the contention that the claim against UBS Ltd is so plainly and obviously precluded by the Criterion principle that leave to serve out should be set aside.

Attribution of knowledge or suspicion to UBS Ltd

29.  UBS Ltd submits that UBS AG’s alleged knowledge cannot be attributed to UBS Ltd, and that it cannot therefore be made liable for knowing receipt.

30.  The relevant facts pleaded by the plaintiffs include:

(1)  Alan Fung was the central member of the core team at UBS AG responsible for China Metal’s IPO and listing applications.  He is said to have knowledge and/or suspicions of various matters including Mr Chun’s alleged dishonest acts, statements and concealment in relation to the IPO.

(2)  UBS Ltd was a wholly owned subsidiary of UBS AG.  The business model adopted was designed to transfer all of UBS Ltd’s credit risk and substantially all of its market, funding and other risks to UBS AG.

(3)  UBS AG and UBS Ltd had senior management personnel in common.  At all material times, one director of UBS Ltd was also on UBS AG’s group executive board.  Another director of UBS Ltd although not on the group executive board had a significant management role in both UBS AG and UBS Ltd.

(4)  UBS AG and UBS Ltd shared business operations in that UBS AG’s staff, systems, policies and process were used in the execution of USB Ltd’s directors’ duties and USB AG’s risk and control functions provided support to USB Ltd.

31.  The Judge considered the legal principles on attribution of knowledge, including the primary rules of attribution found in the company’s constitution or implied in company law, the general rules of attribution applicable to companies and natural persons alike such as the principles of agency, and special rules of attribution fashioned by the court for the purpose of the particular substantive rule, which is a matter of interpretation, taking into account its content and policy (and its language if a statutory rule): see Meridian Global Funds Management Asia Limited v Securities Commission [1995] 2 AC 500, 506B‑507F.  The judge referred to other authorities and noted that different persons’ knowledge can be attributed to the company depending on the context and purpose in and for which attribution is invoked or disclaimed.  She concluded that the sensitivity to the legal and factual context was such that it would not be possible or satisfactory for the court to reach a decision on this question without a trial.  She considered that the plaintiffs had shown a sufficient framework that could support a special rule of attribution but which could not be satisfactorily determined at an interlocutory stage.

32.  For the intended appeal UBS Ltd submits that the facts relied upon by the plaintiffs are plainly insufficient to justify attribution of knowledge or suspicions to UBS Ltd.  However, all that the plaintiff needs to show at this stage in relation to the question of attribution is a serious issue to be tried.  This is a relatively low threshold.  As the Judge said, the question of attribution is sensitive to the legal and factual context.  It should be borne in mind that the plaintiffs’ primary case is against UBS AG, on the basis that UBS Ltd acquired the Notes and Warrants for or on behalf of UBS AG.  It is the defendants who contend that the Notes and Warrants were held by UBS Ltd for itself and not for UBS AG, even though they were held in UBS AG’s Euroclear account. Hence the plaintiffs’ alternative claim against UBS Ltd.  It is in this context that the question of attribution of knowledge is to be approached.  We are satisfied that for the reasons given by the Judge, there is a serious issue to be tried based the pleaded outline facts which remain to be fleshed out, and that there is no reasonable prospect of success in the proposed appeal.

33.  Furthermore, as Mr Manzoni SC submits, there are also arguments based on the primary and general rules of attribution such as whether UBS AG’s knowledge should be attributed to UBS Ltd on the principle that a company is bound by the unanimous acts of its shareholders, or on the basis that UBS AG was acting as UBS Ltd’s agent in holding the Notes and Warrants.  In conclusion, we do not think leave to appeal should be granted in relation to attribution of knowledge.

Time‑bar and the meaning of fraud

34.  UBS Ltd received the sum of $244 million in 2009.  The writ was issued on 25 July 2019.  The plaintiffs rely on section 26(1)(a) of the Limitation Ordinance (Cap 347) to seek to postpone the commencement of the limitation period to 26 July 2013, the date when provisional liquidators were appointed in respect of China Metal.  Section 26(1)-(3) provide as follows:

“ (1) Subject to subsection (4), where in the case of any action for which a period of limitation is prescribed by this Ordinance, either—

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

(b) any fact relevant to the plaintiff’s right of action has been deliberately concealed from him by the defendant; or

(c) the action is for relief from the consequences of a mistake,

the period of limitation shall not begin to run until the plaintiff has discovered the fraud, concealment or mistake (as the case may be) or could with reasonable diligence have discovered it.

(2) References in subsection (1) to the defendant include references to the defendant’s agent and to any person through whom the defendant claims and his agent.

(3) For the purposes of subsection (1), deliberate commission of a breach of duty in circumstances in which it is unlikely to be discovered for some time amounts to deliberate concealment of the facts involved in that breach of duty.”

35.  UBS Ltd submits that section 26(1)(a) does not apply to an action in knowing receipt, and that “fraud” within the meaning of section 26(1)(a) does not encompass the kind of unconscionable conduct that founds liability for knowing receipt.  The claim is therefore plainly time‑barred.

36.  In Yeu Shing Construction Co Ltd v Attorney General [1988] HKC 710, Godfrey J had to consider the meaning of “fraud” in the then section 26(1)(b) which postponed the limitation period where “the right of action is concealed by the fraud” of the defendant.  He said, at p 714C, following Clark v Woor [1965] 1 WLR 650: “The reference to ‘fraud’ in s 26 may, for present purposes, be taken as a reference to unconscionable behaviour”.  Section 26(1)(b) has since been amended to refer instead to deliberate concealment, but the plaintiffs submit that the meaning of “fraud” in the original paragraphs (a) and (b) should be the same, and that the removal of “fraud” from paragraph (b) does not change the meaning of that word in paragraph (a).

37.  The plaintiffs also pray in aid a passage in the judgment of Lord Neubergerin Williams v Central Bank of Nigeria [2014] AC 1189 at §119:

“ … in some cases of dishonest assistance or knowing receipt, even though the normal six year period may have expired, a claimant may be able to invoke section 32 of the 1980 Act, which postpones the commencement of the six years, in cases ‘based upon the fraud of the defendant’, or where the defendant has ‘deliberately concealed’ relevant facts from the claimant.”

38.  The Judge agreed with the plaintiffs that there is a serious issue to be tried that “fraud” in section 26 includes where the defendant acts with “some knowledge of the impropriety of the conduct involved” (a phrase used in Banque Commerciale SA (in liq) v Akhil Holdings Ltd (1990) 169 CLR 279, 286 in relation to a provision[12] similar to section 20(1)(a) of the Limitation Ordinance) or unconscionably.

39.  As pointed out by the plaintiffs, UBS Ltd did not initially seek leave to appeal on this point, but only sought to add this ground after the decision in Hing Yip Holdings (Hong Kong) Ltd (in compulsory liquidation) v Cellmark China Ltd (in voluntary liquidation), supra, was handed down on 17 May 2021, in which Mimmie Chan J expressed the view, obiter, that a claim in knowing receipt is not an action based upon fraud within the meaning of section 26(1)(a),[13] adopting the reasoning in a first instance English decision: Brent Borough Council v Davies [2018] EWHC 2214 (Ch).

40.  Although the cases on knowing receipt refer to a state of mind such as to make it unconscionable for the defendant to retain the benefit of the receipt, the degree of knowledge which might make such retention unconscionable varies with the context.  This allows the court to set a standard that is appropriate to exigencies of the transaction in question: Snell’s Equity (34^th ed), §30-072. What precisely is the knowledge that is required on the part of UBS Ltd in the present case, and what knowledge it in fact had, are questions for the trial. It would in our view be undesirable to try to determine, at this stage, based on the (unproven) facts alleged in the statement of claim alone, the controversial question of what “fraud” means within section 26(1)(a) and whether section 26(1)(a) can apply in this case as against UBS Ltd: see Moulin Global Eyecare Holdings Ltd, §11; Altimo Holdings and Investment Ltd, §84.  It is often undesirable to determine novel and difficult points of law based on hypothetical facts.  All the more so here since:

(1)  There is a separate argument raised by the plaintiffs based on section 26(2) alleging that the action is based on the fraud of Mr Chun and he is a person through whom UBS Ltd claims (in the sense that it obtained payment through the acts of Mr Chun).

(2)  Relying on section 26(3), the plaintiffs allege that UBS Ltd deliberately breached its duty to account arising from its liability for knowing receipt, by failing immediately to restore the Notes and Warrants proceeds to China Metal, that Mr Chun also deliberately breached his duties to China Metal, and that these breaches were deliberately committed in circumstances in which they were unlikely to be discovered for some time.  UBS Ltd has not so far advanced any serious argument that section 26(2) and (3) do not raise serious issues to be tried.

(3)  Further, there is a knowing receipt claim against UBS AG based on the same set of facts, and UBS AG has also taken the limitation point, which will be a matter for trial as UBS AG has not sought to strike out that claim. 

41.  Accordingly, we do not think leave to appeal should be granted in relation to this point either.

Conclusion

42.  For the above reasons we decline to grant leave to appeal.  UBS Ltd’s summons is therefore dismissed.  On a nisi basis, costs will be to the plaintiffs, summarily assessed in the sum of $375,000.