C Y FOUNDATION GROUP LTD AND ANOTHER v. BEST MAX HOLDINGS LTD AND OTHERS

HCA 787/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.787 OF 2011

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JUDGMENT

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The application before the Court

1.      Before the Court is an application by Lo Chun Cheong Ronald (“Lo”), the 2^nd Defendant, under Order 18, rule 19(1)(a) of the Rules of the High Court (Cap 4) to have the Statement of Claim against him struck out and the action against him dismissed on the ground that the Statement of Claim discloses no reasonable cause of action against him.

Relevant principles

2.      For present purposes, the relevant principles governing the exercise of the Court’s summary power to strike out a pleading are uncontroversial and can be stated briefly: 

(1)     First, this being an application under rule 19(1)(a) only, no evidence is admissible under rule 19(2).  The Court will simply assume the facts as pleaded in the statement of claim to be proved and determine, on that basis, whether the pleading discloses a reasonable cause of action.

(2)     Second, the question for the Court is whether the allegations as pleaded in the statement of claim disclose some cause of action or raises some question that ought to be tried.  It is not concerned with an assessment of the strength or weakness of the case.  The mere fact that the case is weak, and not likely to succeed, is no ground for striking it out.  The Court would only strike out when it is impossible, and not just improbable, for the case to succeed.

(3)     Third, where a pleading is defective only for want of particulars to which the other side is entitled, particulars (and not an order to strike out the pleading) should have been sought under Order 18, rule 12.  The Court can properly refuse to strike out even a pleading seriously lacking in particularity if the defect is not the result of a blatant disregard of Court orders and can be remedied.

(4)     Fourth, where a statement of claim does not disclose the cause of action relied upon but there is reason to believe that the case can be improved by amendment, the Court may give an opportunity to amend, even though the formulation of the amendment is not before the Court.

See Hong Kong Civil Procedure 2013, Volume 1, paragraph 18/19/3 (sub-paragraph (4)), 18/19/4 (sub-paragraph (2)) and 18/19/7. 

3.  At the hearing, Mr Douglas Lam, Counsel for the Plaintiffs, indicated the Plaintiffs’ intention to file and serve voluntary particulars of paragraph 23(2) of the Statement of Claim and handed up a draft of such particulars (“Draft Particulars”).  In deciding this application, in addition to the Statement of Claim, I shall also have regard to the Draft Particulars:

(1)     As noted in Hong Kong Civil Procedure 2013, Volume 1, paragraph 18/12/65, the practice of provision of voluntary particulars has been indirectly recognised by Order 34, rule 3(2).

(2)     Even if objection be taken by the Defendants to the service of the particulars so that the Plaintiffs have to apply for leave to serve the same under an order of the Court, given that they do serve to better inform the 1^st, 2^nd and 3^rd Defendants of the Plaintiffs’ allegation of siphoning off of the 1^st Defendant’s funds under paragraph 23(3) of the Statement of Claim, I see no reason why leave would not be granted if the matter should come to be argued.

(3)     It will be seen that a significant part of the complaints underlying this application is that the Statement of Claim contains insufficient particulars.  The Draft Particulars show, in one instance, how such deficiency can be remedied.

(4)     The Draft Particulars also serve to demonstrate the possible improvement of the Statement of Claim, if inadequate, by amendment.

4.  Turning then to the Statement of Claim and the Draft Particulars, I shall first of all set out in paragraphs 5 to [] below the allegations of primary fact made by the Plaintiffs in such pleading.  Unless otherwise stated, the references in brackets to numbered paragraphs and schedules are to the paragraphs of and schedules to the Statement of Claim and are included to indicate source.

The CY Foundation group of companies and their relevant officers

5.  C Y Foundation Group Limited (“CY Foundation”), a company incorporated in Bermuda on 27 May 1994 and registered in Hong Kong under s 333 of the Companies Ordinance (Cap 32) and the 1^st Plaintiff herein, has since 17 October 1994 been listed on the Main Board of the Hong Kong Stock Exchange (“Exchange”) under stock code 1182 (paragraph 1).  The core businesses of CY Foundation and the group of companies under it (“Group”) are the manufacture and trading of packaging products, watch trading and digital entertainment business (paragraph 22(6)).

6.  Ace Precise International Limited (“Ace Precise”), a company incorporated in the British Virgin Islands (“BVI”) and the 2^nd Plaintiff herein, is a wholly owned subsidiary of CY Foundation (paragraph 2).  CY Foundation and Ace Precise will be called the “Plaintiffs” when referred to collectively.

7.  CY Foundation also wholly owns CYC Investments Limited (“CYC Investments”) which, in turn, wholly owned Villaway Limited (“Villaway”), a Hong Kong company incorporated on 3 December 2007, until 25 September 2008 (paragraph 8).

8.  CY Foundation had, inter alia, the following officers and employees:

(1)   the 3^rd Defendant, Cheng Chee Tock Theodore (“Cheng”), as Chairman and Executive Director until he was summarily dismissed from such positions on 20 April 2011, having already been suspended on 8 April 2011 (paragraph 5);

(2)   the 4^th Defendant, Ho Chi Chung Joseph (“Ho”), as Executor Director until 6 April 2011 when he was not re-elected at CY Foundation’s 2010 annual general meeting (“2010 AGM”) and as Acting Chief Executive Officer until he was summarily dismissed from such position on 20 April 2011, having already been suspended on 8 April 2011 (paragraph 6); and

(3)   the 5^th Defendant, Yeung Tak Hung Arthur (“Yeung”), as Chief Operating Officer until he was summarily dismissed from such position on 5 May 2011 (paragraph 7).

9.  In addition to their said positions in CY Foundation, Cheng and Ho were also directors of Ace Precise (paragraphs 5 and 6).  Cheng’s position with Ace Precise was also suspended on 8 April 2011 (paragraph 5). 

10.  Prior to the suspension and dismissal of these officers and employees, trading in the shares of CY Foundation on the Exchange had already been suspended on 31 August 2010 after a raid of CY Foundation’s offices by the Independent Commission Against Corruption on 30 August 2010 and the arrest of Cheng, his wife, Leonora Yung (“Yung”), one Philip Yu (see paragraphs 16 and 17 below) and others on around such date (paragraph 1).

Transactions complained of by Plaintiffs

Subscription of Convertible Bond

11.  In around late 2007 or early 2008, CY Foundation, through Villaway (which was then still wholly owned by CY Foundation indirectly through CYC Investments), invested in无锡中青网络科技有限公司 (Wuxi CYC Network Technology Co. Limited)[1] (“Wuxi Jujin”) which was established in the People’s Republic of China (“PRC”) on 9 July 2003 as an enterprise with investment of Taiwan, Hong Kong and overseas Chinese in the PRC (paragraphs 9(1) and 14).  According to the records of 江苏省无锡工商行政管理局 (Jiangsu Province Wuxi Administration for Industry and Commerce Bureau), Wuxi Jujin carries on business in the fields of calculator software and hardware technology development and services, calculator network technology services and smart control system management (paragraph 9(3)).

12.  More particularly, Villaway acquired a 40.5% interest in Wuxi Jujin (which then had a registered share capital of RMB2 million) at a consideration of RMB1.62 million from 5 existing shareholders (paragraph 14).

13.  Then, in around February 2008, Cheng (then CY Foundation’s Chairman and Executive Director) proposed that CY Foundation should make further investments in Wuxi Jujin by increasing the interest of Villaway in Wuxi Jujin to 71% out of an increased share capital of RMB10 million by bringing the total capital contribution of Villaway to Wuxi Jujin up to RMB7.1 million (paragraph 15). 

14.  However, in around May or June 2008, Cheng decided to abort such intended further investment in Wuxi Jujin by CY Foundation due to the unsatisfactory results of the legal due diligence in respect of Wuxi Jujin (paragraph 15).

15.  To continue with this account, it is now necessary to introduce Best Max Holdings Limited (“Best Max”), another company incorporated in the BVI and the 1^st Defendant herein, and the persons behind or associated with it. 

16.  Prior to 1 April 2011, only 1 share[2] of US$1 of and in Best Max had been issued to Philip Yu (“Yu”) who was also the sole director of Best Max from 28 April to 15 August 2008 (paragraphs 3(1) and (2) and 10(4)). 

17.  Yu was at all material times:

(1)    a personal consultant and close associate of Cheng and Yung, and has been acting as the Chengs’ investment consultant in respect of their private investments (paragraph 10(1) and (3)); and

(2)    acting as the de facto treasurer of the Group and had been responsible for dealing with the Group’s funds at Cheng’s instructions (paragraph 10(2)).

18.  On 15 August 2008, Yu was replaced by Lo who thereafter remained as the sole shareholder and director of Best Max until 1 April 2011 (paragraphs 3(2), 4 and 10(4)).

19.  Shortly after the change of shareholding and directorship of Best Max from Yu to Lo, on 25 September 2008, Cheng procured CYC Investments to transfer all its shares of and in Villaway (which then had a 40.5% interest in Wuxi Jujin) to Best Max, so that Villaway became a wholly owned subsidiary of Best Max as from 25 September 2008 (paragraphs 8 and 23(2)).

20.  Despite the fact that CY Foundation had pulled out of making further investment in Wuxi Jujin only in May/June 2008, in December 2008, Cheng caused and/or procured Ace Precise (CY Foundation’s wholly owned subsidiary) to enter into a Subscription Agreement dated 3 December 2008 (“Subscription Agreement”) with Best Max pursuant to which Ace Precise subscribed for the “HK$12,000,000 Zero Coupon Convertible Bond due 2 December 2010” dated 4 December 2008 (“Convertible Bond”) issued by Best Max, upon which CY Foundation, through Ace Precise, then advanced HK$12,000,000 (“Sum”) to Best Max, principally to be applied by Best Max to subscribe for shares in Wuxi Jujin up to 90.08% of an enlarged issued share capital within 12 months from the date of the Convertible Bond (paragraphs 13(1), 16 and 17 and Schedules 1 and 2).

21.  As security for the performance od Best Max’s obligations under the Subscription Agreement, the following documents, all dated 3 December 2008, were executed in favour of Ace Precise pursuant to Clause 2.3 of the Subscription Agreement (paragraph 20 and Schedule 1):

(1)   a “Mortgage on the entire issued share capital of [Best Max]” executed as mortgagor by Best Max and its then sole shareholder and director, Lo, and a “Mortgage on the entire issued share capital of [Villaway]” executed as mortgagor by Villaway and its sole shareholder, Best Max (“Share Mortgages” collectively); and

(2)   a “Guarantee and Indemnity in respect of the obligations of [Best Max]” executed as guarantor by Lo (“Guarantee”).

22.  With regard to the Guarantee, Clauses 3.1 and 3.2 of the Guarantee provided for its release upon the earlier of occurrence of the following events:

(1)   the full payment of the obligations secured by the Guarantee;

(2)   the full conversion of the Convertible Bond by Ace Precise; or

(3)   the obtaining of all the approvals, licences and permits as may be required by Wuxi Jujin for the operation of its business in the PRC within 12 months from the date of issue of the Convertible Bond (Schedule 3).

23.  The subscription of the Convertible Bond, which was issued on 4 December 2008, was not commercially or otherwise justified from either party’s view:

(1)   Having just failed CY Foundation’s legal due diligence in around mid 2008, Wuxi Jujin’s situation had not improved by December 2008.

(2)   There was therefore a real and serious risk that the underlying investment of Best Max in Wuxi Jujin and hence the shares in Best Max would be worthless and that Best Max would be unable to repay the principal amount of the Convertible Bond, i.e. the Sum.

(3)   No interest was payable on the Convertible Bond.

(4)   Wuxi Jujin had (and still has) not obtained the necessary approvals, licences and permits for the operation of its business in the PRC.  The Share Mortgages could therefore only provide little security to the Plaintiffs and the recoverability of the Convertible Bond and the value of the shares mortgaged to Ace Precise under the Share Mortgages are highly suspect.

(5)   The assets and creditworthiness of Lo are in doubt.  It was wholly unclear whether Lo personally could honour the Guarantee. 

(6)   The business of Wuxi Jujin was not in line with the core businesses of CY Foundation and the Group (paragraph 22).

24.  The subscription of the Convertible Bond was merely a sham device whereby Best Max and/or Lo, acting in concert with Cheng and his associates including Yu, siphoned off the Sum from CY Foundation to Best Max and/or Lo who acted in concert with Cheng and his associates (paragraph 23(3)).

(1)   On 10 December 2008, a cheque for HK$12,000,000 was deposited into a bank account held by Villaway (then a wholly owned subsidiary of Best Max which did not have a bank account in Hong Kong) (Draft Particulars paragraph (1)).

(2)   Such account had a zero balance immediately prior to such deposit (Draft Particulars paragraph (2)).

(3)   In the meantime, on 8 December 2008, Villaway had issued a cheque of HK$7,400,000 to Feng Well Property Corporation (“Feng Well”), a company incorporated in the BVI and owned and/or controlled by Yung (Cheng’s wife).[3] This cheque was signed by Lo and Yu and was cleared on 10 December 2008, being the same date as the HK$12,000,000 deposit (Draft Particulars paragraphs (3) and (5)). 

(4)   On the same day, Villaway issued another cheque of HK$4,001,000 to Havaleigh International Ltd (“Havaleigh”), a company incorporated in the BVI and owned and/or controlled by Yu.  This cheque was also signed by Lo and Yu and was cleared on 11 December 2008 (Draft Particulars paragraphs (4) and (6)).

(5)   Neither Feng Well nor Havaleigh had any legitimate connection with Wuxi Jujin so that the said 2 payments totalling HK$11,401,000 out of the Sum to them could not have been made for the purposes of financing or investing in Wuxi Jujin, as purportedly stated in the Subscription Agreement (Draft Particulars paragraph (8)).

(6)   Further, the payment of HK$7,400,000 to Feng Well, even if legitimate, was in any event a disclosable transaction under the Listing Rules of the Exchange.  There was, however, neither a declaration of interest by Cheng nor announcement by CY Foundation (Draft Particulars paragraph (7)).

(7)   Pending discovery and the administration of interrogatories, the remaining HK$599,000 was paid to or used for the benefit of Best Max and/or Lo (Draft Particulars paragraph (9)).

Release of Lo from Guarantee

25.  Then, on around 18 June 2010, Cheng (acting purportedly on behalf of Ace Precise) executed a “Deed of Release for Guarantee and Indemnity in respect of the obligations of [Best Max]” (“Release”), whereby Lo was purportedly released from all obligations and liabilities under the Guarantee (paragraphs 19(2) and 25).

26.  Cheng executed the Release notwithstanding:

(1)   that he had not been properly authorised to do so by CY Foundation or Ace Precise (paragraph 27);

(2)   that, as at the date of the Release, none of the contractual conditions for the release of the Guarantee (in particular, the obtaining of the necessary approvals, licences and permits for the operation of the business of Wuxi Jujin in the PRC) had been fulfilled (paragraphs 26 and 29); and

(3)   that the failure to obtain the necessary approvals, licences, and permits for the operation of the business of Wuxi Jujin in the PRC in fact constituted an event of default under Condition 9.1 of the Convertible Bond, thereby rendering the principal amount then outstanding under the Convertible Bond (i.e. HK$12,000,000) immediately due and payable (paragraph 30).

Conversion of Convertible Bond

27.  Lastly, on 1 April 2011, as a director of Ace Precise, Ho signed 2 Conversion Notices (“Conversion Notices”), purportedly to convert the principal amount of the Convertible Bond (HK$12,000,000) into shares of US$1 each in Best Max (paragraph 34).

28.  On the same day:

(1)     Lo resigned as a director of Best Max (paragraphs 3(2) and 4).

(2)     Lo also transferred the 1 share held by him in Best Max to Ace Precise (paragraph 4) and Best Max issued and allotted to Ace Precise 49,999 shares (paragraph 3(2)), thereby making Best Max a wholly owned subsidiary of Ace Precise since 1 April 2011.

(3)     Cheng, Ho and one Samuel Woelm were appointed as directors of Best Max (paragraph 3(2)).

29.  There was no commercial or other justification for the Conversion Notices which were not bona fide in the best interests of the Plaintiffs:

(1)   The necessary PRC approvals, licences, and permits for the operation of the business of Wuxi Jujin in the PRC had still not been obtained (paragraph 35(1)).

(2)   No or no proper due diligence had been conducted on the business of Wuxi Jujin as a result of Cheng’s instructions (paragraphs 33 and 35(2)).

(3)   Nor had there been any independent valuation.  The “Analysis Report on the Value Analysis of 100% Equity Interest of Wuxi CYC Network Technology Co., Ltd.” prepared by Avista Valuation Advisory, which adopted assumptions provided by CY Foundation’s management (including the groundless assumption that Wuxi Jujin “will obtain the official license for operations from relevant regulatory bodies by mid 2011”), was highly questionable (paragraph 35(3)).

(4)   The Conversion Notices were purportedly signed by Ho on 1 April 2011, which was just days before the 2010 AGM to be held on 6 April 2011, at which a majority of the then directors of CY Foundation (including Ho himself) would be (and were in fact) replaced by new directors.  The giving of the Conversion Notices on the eve of the replacement of the majority of the directors of CY Foundation by new directors was a last minute attempt on the part of Cheng and his associates, including Ho and Yeung (CY Foundation’s Chief Operating Officer who had been in charge of the Wuxi Jujin investment project and the primary promoter of the conversion of the Convertible Bond since around late 2010), to prevent Ace Precise from demanding repayment of the Sum when the change of control of the board of CY Foundation became imminent and inevitable (paragraphs 32, 33, 35(4) and (5)).

Summary of claim against Lo

30.  Both Mr Lam for the Plaintiffs and Mr Bernard Mak, Counsel for Lo, have identified the following 5 causes of action against Lo from the Statement of Claim:

(1)   Dishonest assistance in Cheng’s breach of fiduciary duties to Plaintiffs in procuring Ace Precise to enter into the Subscription Agreement and subscribe for the Convertible Bond (paragraph 24(3)(b));

(2)   Continuing liability under the Guarantee (paragraph 31);

(3)   Restitution of the Sum (paragraph 38);

(4)   Causing loss to the Plaintiffs by unlawful means (paragraph 39); and

(5)   Conspiracy to injure the economic interests of the Plaintiffs by unlawful means (paragraph 39).

31.  I shall consider Mr Mak’s criticisms of the pleading on each of such causes of action.

Dishonest assistance

32.  Paragraph 24(3)(b) of the Statement of Claim pleads that:

“(3) in the circumstances:-

…

(b)   the 2^nd Defendant is liable for dishonest assistance in the 3^rd Defendant’s breach of the said Fiduciary Duties: …”

33.  Insofar as Lo is concerned, by “the circumstances”, the Plaintiffs are referring to paragraph 24(2) which reads:

“the 1^st and 2^nd Defendants well knew or at least turned a blind eye to the fact that the 3^rd Defendant caused the 2^nd Plaintiff to enter into the Subscription Agreement in breach of his fiduciary duties to the 1^st and 2^nd Plaintiffs.”

34.  Such averment follows this preamble in the opening sentence of paragraph 24:

“By reason of the matters pleaded in Paragraphs 22 and 23 above”

The matters set out in paragraphs 22 and 23 of the Statement of Claim have been set out in paragraphs 16, 17, 18, 19, 23 and 24 above.

35.  Mr Mak’s criticisms of the pleading of the case of dishonest assistance are two-fold.

36.  First, it is essential to a claim on dishonest assistance that the defendant accessory has acted dishonestly (Royal Brunei Airlines v Tan [1995] 2 AC 378).  The Court will not infer dishonesty from facts which are consistent with innocence (Three River District Council v Governor and Company of the Bank of England (No.3) [2003] 2 AC 1, per Lord Millett at 291, applied in De Krassel v Chu Vincent [2010] 2 HKLRD 937, per Sakhrani J at §44.  The facts and circumstances pleaded in paragraphs 22 and 23 of the Statement of Claim are plainly consistent with innocence.  In short, Mr Mak suggests that some of such facts and circumstances could be viewed in a neutral light while there might be innocent explanations for others.

37.  I share Mr Lam’s observation that Mr Mak is inviting the Court to strike out on the ground of improbability, which is impermissible.  Apart from the fact the matter is not quite as plain or obvious to me, in my view, the questions whether the making of the Subscription Agreement and the subscription of the Convertible Bond in the circumstances pleaded by the Plaintiffs could be explained and whether there are in fact innocent explanations for such transactions must be answered with reference to evidence and are, for that reason, questions for trial. 

38.  Second, although no attempt has been made on behalf of Lo to seek clarification by asking for further and better particulars of the claim on dishonest assistance prior to his application to strike out, Mr Mak says that the Plaintiffs have failed to plead any facts, matters or circumstances upon which:

(1)   Lo is alleged to have assisted in Cheng’s breach of fiduciary duties;

(2)   the Plaintiffs rely to show that:

(A)   Lo had actual knowledge of Cheng’s breach of fiduciary duties;

(B)   if inquiry had been made by Lo, he would have known of Cheng’s breach of fiduciary duties.

39.  With respect, it seems to me clear that Lo is alleged by the Plaintiffs to have assisted in Cheng’s breach of fiduciary duties to them relating to the making of the Subscription Agreement and the subscription of the Convertible Bond by:

(1)   taking over from Yu the entire shareholding and the sole directorship of Best Max;

(2)   (as the sole shareholder and director of Best Max) causing Best Max to accept the transfer of the shares of Villaway, enter into the Subscription Agreement, execute the Share Mortgages, issue the Convertible Bond and receive the Sum using Villaway’s bank account;

(3)     (in his personal capacity) signing the mortgage in respect of his share in Best Max and the Guarantee; and

(4)   (as one of the signatories of Villaway’s bank account) issuing the cheques by which the Sum was expended for purposes inconsistent with those provided for in the Subscription Agreement.

40.  As for Lo’s knowledge of Cheng’s breach of fiduciary duties (whether actual or “blind eye”), the proof of which is essential to the establishment of his dishonesty,[4] there is no controversy between the parties that fraud or dishonesty must be distinctly alleged and sufficiently particularised.  See, e.g., Three Rivers District Council v Governor and Company of the Bank of England (No.3), supra, per Lord Millett at §§184-186 adopted by the Hong Kong Court of Appeal in Peconic Industrial Development Limited v Yu Ka Hong Paul [2006] 4 HKC 406, per Cheung JA at §33.

41.  Paragraph 24(2) of the Statement of Claim has distinctly asserted Lo’s knowledge of Cheng’s breach of fiduciary duties, actual or “blind eye”.

42.  It is also reasonably clear to me from the reference to paragraphs 22 and 23 of the Statement of Claim that the Plaintiffs are relying on the circumstances in which the Subscription Agreement was made and the Convertible Bond was subscribed pleaded in those paragraphs, in particular, the lack of justification for such transactions, and the manner in which the Sum had been applied for purposes inconsistent with the terms of the Subscription Agreement to invite the Court to find or infer that Lo either knew of or turned a blind eye to Cheng’s breach of fiduciary duties.

43.  Further, and in any event, consistent with the principle mentioned in paragraph 2(3) above, a dishonest assistance claim is not liable to be struck out for mere want of particulars to the plea of knowledge.  In Rigby v Decorating Den Systems Limited, unreported, 15 March 1999, Peter Gibson LJ said:

“It is also to my mind clear from the precedent books to which Mr Cogley, appearing for Mrs Rigby drew attention, that a pleading of knowledge in a fraud plea is one which can stand even though no particulars are given – see for example “Bullen and Leake and Jacobs Precedents of Pleadings” 13^th edition, page 430.  In Atkins Court Forms volume 27, it is noted at page 226 that:

“Particulars of … knowledge may be ordered if they are not provided in the statement of claim …It is stronger, as well as being better practice, to plead them in the statement of claim.”

            But that is not to say that it is a requirement of the rules that they must be pleaded, provided that actual knowledge is unequivocally pleaded, nor is it suggested that the pleading can be struck out if it does not contain such particulars of knowledge.  Of course, if there is a pleading that a person “knew or ought to have known” particular mattes, then that rolled-up plea should be particularised even though Evans-Lombe J in the Continental Assurance case did not think that it did require particulars to be given.  There is clear authority, at any rate in relation to a case where dishonesty is alleged, that particulars of that rolled-up plea must be given – see Belmont Finance Corporation Limited v Williams Furniture Limited [1979] Ch 250 at 268.

            For my part I have no hesitation in upholding the judge’s conclusion on the first point.  It does not seem to me a necessary requirement for a pleading of this nature, where it is quite clear that fraud is being alleged and where the pleading expressly states that the defendants had the relevant knowledge, that particulars of knowledge must be given.  That to my mind is sufficient to enable the plea to withstand an application to strike out.  It was, of course, open to the defendants to seek further particulars of that pleading of knowledge, and if they had not been provided it may be that the defendants could have proceeded to seek some sanction.  But in the present case, it has not been asserted that the defendants were unaware of the plaintiffs’ case against them and, as I have said, they have at no time sought to have that knowledge particularised in a way which could lead to the striking out of the action.  Accordingly, for my part, I would dismiss the defendant’s appeal on the first point.”

44.  Peter Gibson LJ’s observation in Rigby was applied in Peconic Industrial Development Limited v Yu Ka Hong Paul, supra, per Cheung JA at §37.

45.  I refuse to strike out the claim on dishonest assistance against Lo.

Guarantee

46.  The relevant paragraphs of the Statement of Claim are paragraphs 31 and 37 from which it is clear that the enforcement of the Guarantee is premised upon both the Release and the Conversion Notices being liable to be set aside on the ground that Lo knew of or turned a blind eye to the fact that Cheng signed the Release without authority and/or in breach of fiduciary duties and Ho signed the Conversion Notices in breach of fiduciary duties.  In support, the Plaintiffs simply repeat paragraph 23 of the Statement of Claim which, read together with the Draft Particulars, pleads the matters set out in paragraphs 16, 18, 23(1) and 24 above.

47.  Mr Mak points out that the matters mentioned in paragraph 23 of the Statement of Claim do not show, and the Plaintiffs have failed to plead any other matters, facts or circumstances upon which they rely to show:

(1)   that Cheng did not have authority to execute the Release;

(2)   that such execution was in breach of fiduciary duties;

(3)   that Lo had actual knowledge of Cheng’s lack of authority or breach of fiduciary duties;

(4)   that, if inquiry had been made by Lo, he would have become aware of Cheng’s lack of authority or breach of fiduciary duties;

(5)   that the Conversion Notices were signed by Ho in breach of fiduciary duties or that Lo knew of or turned a blind eye to such breach.

48.  I agree with Mr Mak that paragraph 23 of the Statement of Claim is not concerned with the execution of either the Release by Cheng or the Conversion Notices by Ho.  However, it does appear to me that the references in paragraphs 31 and 37 of the Statement of Claim to paragraph 23 are simply mistaken and the correct references should be to paragraphs 26, 29 and 30 (the substance of which has been set out in paragraph 26 above) in respect of the Release and paragraph 35 (the substance of which has been set out in paragraph 29 above) in respect of the Conversion Notices. 

49.  If so, it seems to me to be reasonably clear that the Plaintiffs are relying on the circumstances existing at the time when the Release and the Conversion Notices were executed (in particular, the continuing absence of the necessary approvals, licences and permits for Wuxi Jujin’s business in the PRC) which, the Plaintiffs say, made these transactions unjustifiable, to invite the Court to find or infer that Lo either knew of or turned a blind eye to Cheng and Ho’s breaches of fiduciary duties.

50.  Further, and in any event, what I have said in paragraphs 2(3), 43 and 44 above concerning the plea of knowledge in the context of the claim on dishonest assistance applies equally to the plea of knowledge for the purposes of setting aside the Release and the Conversion Notices and enforcing the Guarantee.

51.  Mr Mak next submits that, on the facts pleaded, the Guarantee had been discharged under Clauses 3.1 and 3.2 thereof (see paragraph 22 above) upon the conversion of the Convertible Bond into shares of Best Max. The Plaintiffs have not sought to set aside the transfer by Lo of his 1 share in Best Max or the allotment by Best Max of 49,999 shares to Villaway, thereby affirming the transaction.

52.  I am afraid I do not quite follow this argument.  The said transfer and allotment were effected pursuant to the Conversion Notices.  Ace Precise is seeking an order for the setting aside of the Conversion Notices, the logical consequence of which (if granted) would, in my view, be the undoing of the transfer and allotment of Best Max shares to Ace Precise.

53.  In any event, the Plaintiffs are prepared, if necessary, to amend the Statement of Claim to add a claim for the setting aside of the transfer and allotment of the Best Max shares to Ace Precise.  I repeat the principle mentioned in paragraph 2(4) above.

54.  I will not strike out the claim under the Guarantee. There should, however, be leave to the Plaintiffs to amend the second sentence of paragraph 31 and the second sentence of paragraph 37 (both repeating paragraph 23) and, if so advised, to add a claim for an order setting side the transfer and allotment of the Best Max shares to Ace Precise.

Restitution

55.    The claim for restitution is pleaded in paragraph 38 of the Statement of Claim which reads:

“Further or alternatively, in the light of the matters pleaded in Sections D to E above, the 1^st and/or 2^nd Defendants are liable to repay to the Plaintiffs the Sum, i.e. the sum of HK$12,000,000.00 paid by the 1^st and/or 2^nd Plaintiffs to the 1^st Defendant (or as directed by it) under or pursuant to the Subscription Agreement and/or the Convertible Bond.”

Sections D to E cover the subscription of the Convertible Bond and the execution of the Release respectively.

56.    Mr Mak refers to Shanghai Tongji Science & Technology Industrial Co Ltd v Casil Clearing Ltd (2004) 7 HKCFAR 79 in which Ribeiro PJ (with whom all other members of the Court agreed) said at §§67 and 68 (in the context of a claim for restitution based upon the principle of unjust enrichment arising from a total failure of consideration):

“67. A useful framework for approaching such claims which was adopted by both parties involves asking four questions:

(a) Was the defendant enriched?

(b) Was the enrichment at the plaintiff’s expense?

(c) Was the enrichment unjust?

(d) Are any of the defences applicable?

68.       This approach was evolved and is generally accepted in academic writings: …”

57.    The only point taken by Mr Mak on behalf of Lo is that the Plaintiffs have not pleaded any fact that suggests that Lo had been enriched by the payment by CY Foundation, through Ace Precise, of the Sum.  Lo was personally neither the recipient nor transferee of the Sum.  Nor has it been pleaded that Lo had somehow been “benefited” by the Sum.  The last point was made by Mr Mak prior to his being given the Draft Particulars.

58.    According to paragraphs (1) and (2) of the Draft Particulars, the whole of the Sum was paid to and received by Best Max through Villaway’s bank account as a matter of administrative convenience as Best Max itself did not have a bank account.  Even insofar as Best Max may be said to have been enriched by such receipt (which seems to me to be maintainable by the Plaintiffs at least at the pleading stage despite the almost immediate dissipation of the bulk of the Sum by Best Max in circumstances not fully known to the Plaintiffs), a claim for restitution will not lie against a shareholder simply because his company, even solely owned by the shareholder, has received a benefit, unless the Court can lift the corporate veil and deem the shareholder to have been enriched to the same extent as the company where it is alleged and proved that the company is enriched through a fraudulent scheme undertaken by its shareholder: Goff and Jones, The Law of Unjust Enrichment, 8^th Edition (2011), §4-55.  Although the Plaintiffs have pleaded a fraudulent scheme undertaken by Lo and involving Best Max, they have not sought to lift the corporate veil of Best Max.

59.    Mr Lam places reliance on Draft Particulars paragraph (9) which avers that, pending discovery and the administration of interrogatories, a sum of HK$599,000 out of the Sum was paid to or used for the benefit of, inter alia, Lo. 

60.    The question arising is whether the Plaintiffs are entitled to restitution of this smaller amount from Lo personally when such benefit was conferred on him by Best Max.  As a general rule, a claimant is not entitled to the restitution of a benefit conferred by a third party, rather than by himself: Andrew Burrows, The Law of Restitution, 3^rd Edition (2011), p 70.

61.    Although this general rule is subject to wide-ranging exceptions, none has been pleaded.  Nor have I heard submissions that any such exceptions may be pleaded by amendment to the Statement of Claim.

62.    I will, as against Lo, strike out the claim for restitution.

Causing loss by unlawful means

63.    The claim for causing loss by unlawful means is contained in paragraph 39 of the Statement of Claim which reads:

“Further or alternatively, the transactions and events pleaded in Sections D to F were different stages of the overall scheme whereby the Defendants have caused loss to the Plaintiffs by unlawful means, and/or whereby the Defendants (or any two of them) have conspired together to injure the economic interests of the Plaintiffs by unlawful means and, such transactions and events whether independently or collectively, were entered into and/or procured by the 3^rd, 4^th and/or 5^th Defendants in breach of their respective duties owed to the Plaintiffs pleaded in Section B above.”

Section F deals with the giving of the Conversion Notices.

64.    The elements of the tort of causing loss by unlawful means are:

(1)   a wrongful interference with the actions of a third party in which the claimant has an economic interest;

(2)   an intention thereby to cause loss to the claimant; and

(3)   the use of unlawful means.

See OBG Ltd v Allan [2008] 1 AC 1, per Lord Hoffmann at §47.

65.    I can deal with the pleading of this cause of action very shortly by simply expressing agreement with Mr Mak that the tort of causing loss by unlawful means is plainly inapplicable to the facts and circumstances pleaded in the Statement of Claim.  It appears to me that the person who drafted the Statement of Claim (not Mr Lam) inserted the words “whereby the Defendants have caused loss to the Plaintiffs by unlawful means, and/or” in paragraph 39 without really appreciating the technical meaning of “causing loss by unlawful means”.

66.   I will, as against Lo, strike out those words from paragraph 39 and prayer (8)(a) (which claims damages for the tort of causing loss by unlawful means).

Conspiracy to injure economic interests of Plaintiffs by unlawful means

67.    On a claim for conspiracy to injure by unlawful means, it is incumbent on the plaintiff to plead and prove:

(1)     The nature of the agreement;

(2)     The unlawful means alleged;

(3)     Each of the unlawful acts relied on;

(4)     The fact that each act was carried out pursuant to the conspiracy;

(5)     The relevant state of mind of the alleged conspirator.

See De Krassel v Chu Vincent, supra, §41.

68.   Further, when pleading the tort of conspiracy, the pleader must allege at least one overt act which is the act of all the alleged conspirators or, failing that, a number of overt acts which include at least one act on the part of each conspirator.  See Aktieselskabet Dansk Skibsfinansiering v Wheelock Marden & Co Ltd [1994] 2 HKC 264

69.   The conspiracy claim is pleaded in paragraph 39 of the Statement of Claim (see paragraph 63 above).

70.   Mr Mak attacks paragraph 39 for want of particulars (but without having first sought further and better particulars) in that:

(1)     No fact was pleaded to show that each of the Defendants had entered into a conspiratorial agreement.

(2)     No overt act of the alleged conspiracy was pleaded.

(3)     No fact was pleaded to show that the Defendants had a common intention to injure the Plaintiffs.

(4)     No fact was pleaded to indicate that each of the acts of the Defendants was carried out pursuant to the alleged conspiracy.

71.   First, again, I repeat paragraph 2(3) above.

72.   Second, I disagree with the suggestion that the Plaintiffs have not pleaded any overt act of conspiracy.  Insofar as Lo is concerned, the Plaintiffs have set up the acts listed in paragraph 39 above.

73.   As for the other particulars, paragraph 40 of the Statement of Claim states that:

“The Plaintiffs are unable at this stage to plead full and precise particulars of the conspiratorial agreements, but the Court is invited to infer from the coordination and/or joint execution of the acts pleaded above that:-

(1) One or more conspiratorial agreements had been entered into by reach and every one of the said individuals to carry out the said acts.

(2) The said acts were committed with the joint intention of the said individuals in furtherance of the said agreements.

(3)     The implementation of the said agreements resulted in loss and damage to the Plaintiffs.

74.   The Plaintiffs’ inability to give particulars of the alleged conspiratorial agreement(s), common intention and furtherance of the conspiracy is not at all surprising in the circumstances.  Whether the said overt acts involving Lo were committed in furtherance of a conspiratorial agreement and with the common intention to injure the Plaintiffs is a matter of inference to be drawn from the facts pleaded.  See, e.g., Metrowell Holdings Ltd v Periwin Development Ltd [2001] 4 HKC 446, per Chu J at 459B-F.  I agree with Mr Lam that, on the facts pleaded in the Statement of Claim, it is not impossible for the Court to draw the inferences put forward by the Plaintiffs in paragraph 40 of the Statement of Claim.

75.   The conspiracy claim is plainly arguable on the facts pleaded and should be permitted to be maintained. 

Orders

76.   For the above reasons, I order:

(1)   that paragraph 38 and prayer (2)(c) of the Statement of Claim be struck out as against Lo;

(2)   that the Plaintiffs be given leave to amend the second sentence of paragraph 31 and the second sentence of paragraph 37 and, if so advised, to add a claim for an order setting side the transfer and allotment of Best Max shares to Ace Precise; and

(3)   that the words “whereby the Defendants have caused loss to the Plaintiffs by unlawful means, and/or” in paragraph 39 of the Statement of Claim and prayer (8)(a) be struck out as against Lo.

77.    I also make an order nisi that the 2^nd Defendant should pay 85% of the Plaintiffs’ costs of and occasioned by the 2^nd Defendant’s Summons dated 26 October 2011, to be taxed if not agreed, with Certificate for Counsel.

[1] Formerly known as 无锡俱进信息网络技术有限公司（Wuxi Jujin Information Net Technology Co. Limited).

[2] Out of an authorised share capital of US$50,000 divided into 50,000 shares of US$1 each (paragraph 3(1)).

[3] The sole shareholder and director of Feng Well, Cheng Lai Yin, was at the time Yung’s personal assistant and had worked for her for the past 20 years or so and habitually follows Yung’s instructions (Draft Particulars paragraph (5)).

[4] “Liability depends on knowledge.”: per Lord Millett in Twinsectra Limited v Yardley [2002] 2 AC 164 at §127, cited by A Cheung J (as the Chief Judge then was) in Peconic Industrial Development Limited v Chio Ho Cheong, HCA 16255/1999, unreported (1 June 2006).