FAMEWAY FINANCE LTD v. JOY RICH DEVELOPMENT LTD (In liquidation)

HCA 510/2012
HCA 1497/2022

[2024] HKCFI 2204

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 510 OF 2012

__________________

__________________

AND

HCA 1497/2022

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1497 OF 2022

__________________

__________________

(Heard Together)

__________________

________________________

DECISION

________________________

1.  Introduction

1.1  The Defendant in HCA 510/2012 and the Plaintiff in HCA 1497/2022 (“Joy Rich”) was wound up by an order of the Court on 7 August 2013.

1.2  The Plaintiff in HCA 510/2012 is Fameway Finance Limited (“Fameway”). On 29 October 2012, it obtained a default judgment against Joy Rich as no notice of intention to defend was given (“Default Judgment”).

1.3  By an order dated 24 October 2022, Harris J granted leave to Ms Chen Muhua (aka Winky Chan) (“Winky”) and Ms Chen Yuen Wa (“CYW” and collectively “Chen Sisters”) to use the name of Joy Rich:

(1)  to bring fresh proceedings (eventually brought by way of HCA 1497/2022) against Fameway and Liu Yi Dong (aka Lau Kwok Wah Benjamin or Ben Lau) (“Lau”) and to conduct those proceedings for and on behalf of Joy Rich;

(2)  to apply to set aside the Default Judgment and to defend HCA 510/2012 for and on behalf of Joy Rich.

1.4  This is my decision on the following applications:

(1)  Joy Rich’s summons dated 18 January 2023 to set aside the Default Judgment (“Order 13 Application”);

(2)  Lau’s summons dated 11 January 2023 (“Lau’s Application”) to strike out the Statement of Claim in HCA 1497/2022 (“SOC”) and to dismiss the action;

(3)  Fameway’s summons dated 18 January 2023 to strike out the SOC and to dismiss the action (“Fameway’s Application”)[1].

1.5  At the hearing, Joy Rich was represented by Mr Bernard Man SC (leading Mr Jonathan Ng), Fameway by Mr Kenneth CL Chan (appearing with Mr Edward Lun) and Lau by Mr Dixon Co, all of counsel.

1.6  Mr Chan and Mr Co do not dispute Mr Man’s characterization that Joy Rich’s proposed defence in HCA 510/2012 heavily overlaps with its claims in HCA 1497/2022: Joy Rich’s Skeleton Argument dated 23 May 2024 §36.

1.7  At the hearing, all counsel agreed that the Order 13 Application should be heard (and determined) first for the following reasons (with which I agree):

(1)  As between Joy Rich and Fameway, the outcome of the Order 13 Application may have a dispositive effect on Fameway’s Application. Were the Order 13 Application unsuccessful, Mr Man accepts Joy Rich’s claim in HCA 1497/2022 would then not survive and should be struck out. To the contrary, were the Order 13 Application successful, it would necessarily mean that Joy Rich has demonstrated that its case has a real prospect of success and Fameway’s Application must be considered in that light;

(2)  As between Joy Rich and Lau, although the Order 13 Application does not concern Lau, as will be seen below, the Order 13 Application involves consideration of common issues raised by Fameway and Lau to attack the SOC. Mr Man, however, points out that even were the Order 13 Application unsuccessful, Joy Rich’s claim against Lau is still maintainable and ought to proceed to trial.

1.8  Voluminous materials were placed before the court for the purpose of these applications. The written materials lodged by Mr Chan and Mr Co do not address in detail Joy Rich’s factual case made against Fameway and Lau. At the hearing (upon clarifications sought by the court), Fameway and Lau adopted the positions that, for the purpose of these applications only, Joy Rich’s factual case surmounts the requisite merit thresholds in the contexts of both the Order 13 Application and the strike out applications. The focus was primarily on whether it is arguable (to the requisite merit thresholds) that Joy Rich’s proposed defence in HCA 520/2012 and claim in HCA 1497/2022 are legally viable.

2.  Factual background

2.1  In view of the positions taken by the parties at the hearing, it seems to me that the factual background may conveniently be taken from Mr Man’s Skeleton Argument dated 23 May 2024. Some of the background materials have been canvassed in a number of decisions in related actions. Mr Chan has referred to 9 of such decisions[2].

2.2  These proceedings form part of the protracted litigation between 2 rival camps of Joy Rich’s creditors:

(1)  Lau’s camp, consisting of Revelry Gains Limited (“Revelry Gains”), China Railway Logistics Limited (“CRL” formerly known as Chinese Strategic Holdings Limited “CSH”) and Fameway;

(2)  the Chen Sisters.

2.3  Whilst the figures may not be or are no longer accurate, for illustrative purpose, Harris J’s summary at his decision in HCCW 146/2013 dated 31 August 2022 §6 shows that the monetary differences between various permutations (as to which camp’s claims are upheld) are indeed very significant.

2.4  Joy Rich is an investment holding company incorporated in July 2008 with one asset, namely the property known as House B together with the car parking spaces and garden, No 28 Middle Gap Road, Hong Kong (“Property”) which was purchased in 2008 for HK$110 million.

2.5  The sole shareholder of Joy Rich is CYW, the elder sister of Winky. From December 2008 to September 2012, CYW was Joy Rich’s sole de jure director. CYW was also the sole shareholder and de jure director of Greatstep International Limited (“Greatstep”).

2.6  In or about 2005, Lau started an intimate relationship with Winky, and the relationship lasted until around 2011.

(i)  Loan/mortgage transactions

2.7  By a loan agreement dated 9 September 2010 between Fameway and Joy Rich (“Fameway Loan Agreement”), Joy Rich borrowed HK$81 million (“Fameway Loan”) from Fameway which was repayable within 12 months upon a mortgage on the Property (“Fameway Mortgage”).

2.8  By a loan agreement dated 26 January 2011 (“BLAA Loan Agreement”), Greatstep borrowed HK$200,712,328.77 (“BLAA Loan”) from The Building and Loan Agency (Asia) Limited (“BLAA”), a subsidiary of Hong Kong Building Loan Agency Limited (“HKBLA”). The BLAA Loan was repayable within 24 months or when called upon by BLAA, and was secured by the guarantee of Joy Rich and a floating charge over the entire assets of Joy Rich (“Floating Charge”).

2.9  It is Joy Rich’s case that:

(1)  Lau was at all material times a shadow director of Joy Rich and Greatstep, and controlled these companies;

(2)  Lau had effective control over the HKBLA, a listed company with stock code 145 and CRL, a listed company with stock code 8089. In turn, Lau was able to control Revelry Gains and Fameway, which were subsidiaries of HKBLA and CRL.

2.10  After the relationship between Lau and Winky ended:

(1)  On 24 February 2012, BLAA issued a certificate of crystallization in respect of the Floating Charge, which was then registered with the Land Registry on 29 February 2012. On 19 October 2012, BLAA registered the Floating Charge with the Companies Registry;

(2)  By a Deed of Assignment dated 1 March 2012, BLAA assigned its rights, title and interests in the BLAA Loan Agreement and the Floating Charge to Revelry Gains;

(3)  On 29 March 2012, Fameway registered the Fameway Mortgage with the Land Registry, notwithstanding that the same was already created on 9 September 2010.

(ii)  HCMP 430/2013

2.11  In March 2012, Revelry Gains commenced HCMP 430/2013 against Joy Rich to enforce the Floating Charge, seeking, inter alia, an order for delivery of possession of the Property and an order for sale of the Property.

2.12  By his decision dated 29/5/17 in HCCW 146/2013[3] (“29/5/17 Decision”), DHCJ Kent Yee granted leave to the Chen Sisters to use the name of Joy Rich to defend HCMP 430/2013 on conditions that, inter alia, the Chen Sisters be solely responsible for their costs and any adverse costs order.

2.13  Mr Chan and Mr Co do not dispute that Joy Rich’s defence in HCMP 430/2013 is materially the same as its proposed defence in HCA 510/2012 and its claim in HCA 1497/2022.

2.14  On 12 August 2021, the liquidators of Joy Rich (funded by Lau’s camp) sought to take over the defence for and on behalf of Joy Rich in HCMP 430/2013. The liquidator’s application was rejected by Harris J by his decision dated 31 August 2022 in HCCW 146/2013 and the liquidators’ appeal was dismissed by the Court of Appeal in CACV 381/2022 on 6 February 2024.

(iii)   Other related proceedings

2.15  In HCCW 146/2013:

(1)  By a summons filed on 28 August 2015 ("Misfeasance Summons"), Joy Rich's former liquidators claimed against the Chen Sisters under section 276 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance Cap 32 ("CWUMPO"), inter alia, that the Chen Sisters were guilty of misfeasance, breach of trust and duty in misapplying Joy Rich's money in the amount of around HK$630 million.

(2)  By a summons filed on 6 July 2015 ("Unfair Preference Summons"), Joy Rich's former liquidators also claimed against Winky under sections 266 & 266B of CWUMPO and section 51B of the Bankruptcy Ordinance Cap 6, inter alia, that the reduction in the amounts owed by Joy Rich to Winky (corresponding to the assignment of a debt owed by Lau to Joy Rich) was an unfair preference transaction and void.

2.16  On 24 November 2017, the Chen Sisters commenced HCA 2721/2017 against Lau for contribution ("Contribution Claim") in the event that they should be held liable under the Misfeasance Summons and the Unfair Preference Summons. The Chen Sisters' case is that, in respect of the Misfeasance Summons, the disputed payments (including proceeds from the BLAA Loan and the Fameway Loan) were paid out of Joy Rich for the benefit of Lau under his directions and instructions.

2.17  The substantive hearing of the Misfeasance Summons, Unfair Preference Summons and the Contribution Claim was scheduled in July 2019. However, the two summonses and the action were adjourned sine die with liberty to restore shortly before the scheduled hearing.

3.  Joy Rich’s case

3.1  As I understand the parties’ positions adopted at the hearing, Fameway and Lau are content to proceed on following bases:

(1)  Joy Rich has established, to the requisite merit thresholds, that it may be able to demonstrate at trial that Lau was a shadow director of (1) on the borrowers’ side Joy Rich and Greatstep and (2) on the lenders’ side HKBLA, BLAA, CRL and Fameway;

(2)  Joy Rich has established, to the requisite merit thresholds, that it may be able to demonstrate at trial that the Fameway Loan and the Fameway Mortgage were entered into to enable Lau to siphon off the loan proceeds for his own purpose and benefit (“Alleged Scam Transactions”).

3.2  As pleaded in the SOC, it is Joy Rich’s case that the factual matters stated in the preceding paragraph give rise to the following legal consequences:

(1)  As a shadow director of Joy Rich, Lau owed fiduciary duties to Joy Rich: (a) to act in the best interest of Joy Rich, (b) to act in good faith, (c) to avoid any conflict of interests between his duty as director and his personal interests and (d) to exercise his powers as a director for proper purpose: SOC §12;

(2)  Lau’s purpose of procuring the Fameway Loan Agreement and the BLAA Loan Agreement was to enable him siphon off the loan proceeds from BLAA and Fameway (which were at all material times subsidiaries of listed companies HKBLA and CRL respectively) to himself (through entities owned and/or controlled by him): SOC §17;

(3)  The Fameway Loan Agreement and the Fameway Morgtgage should be set aside by reason of Lau’s breach of fiduciary duties (SOC §23):

(a)  Lau was interested in the Fameway Loan Agreement and the Fameway Mortgage by virtue of his shadow directorship and interests in Fameway and the purpose of such transactions is to enable him to siphon off the loan proceeds from Fameway;

(b)  The Fameway Loan Agreement and the Fameway Mortgage were, intended by Lau and to his knowledge, uncommercial and adverse to the interests of Joy Rich;

(c)  In the premises, Lau acted in breach of his fiduciary duties owed to Joy Rich (as pleaded at SOC §12) by causing Joy Rich to enter into the Fameway Loan and the Fameway Mortgage;

(d)  If necessary, Joy Rich avers that Lau’s conduct was dishonest on the standards of honest and reasonable people and Lau also subjectively regarded it to be dishonest;

(e)  Fameway (through the knowledge of Lau and/or the directors of Fameway nominated by Lau) was fully aware that CYW, who entered into these transactions on behalf of Joy Rich, acted under the directions and instruction of Lau and the matters pleaded in the subparagraphs (a) to (d) above.

3.3  The foregoing case was also put forward in substantially similar terms in Joy Rich’s defence to the claim made by Revelry Gains. As summarized at DHCJ Kent Yee in the 29/5/17 Decision:

“[17] The Chen sisters contend that the Charge is liable be set aside for the following reasons:

a. Mr Lau was a shadow director of a web of companies including but not limited to Revelry Gains, BLAA and its parent company listed in Hong Kong, namely, The Hong Kong Building and Loan Agency Limited (“HKBLA”), Fameway Finance Limited (“Fameway”) and its parent company listed in Hong Kong, namely, China Railway Logistics Limited (“CRL”) subsequently renamed as Chinese Strategic Holdings Limited (“CSH”), Greatstep and the Company [ie Joy Rich].

b. Mr Lau entered into the Loan Agreement and the Charge in breach of his fiduciary duties to Greatstep and the Company. BLAA, the lender, had knowledge of the breach.

c. The Charge is therefore avoidable at the instance of the Company.

d. The series of transactions entered into between the Company and BLAA were in fact arranged by Mr Lau being behind both HKBLA and CRL through his other companies and nominees. They were part of the fraudulent scheme in that Mr Lau siphoned off monies from BLAA/Fameway to his own pockets under the disguise of loan transactions with companies also controlled by him (Greatstep and the Company).”

3.4  The SOC and Joy Rich’s Defence and Counterclaim in HCMP 430/2013 both advance a case for rescission of the relevant loan documentations. As will be seen below, for the purpose of the Order 13 Application, Mr Man goes further to contend that the Fameway Loan Agreement and the Fameway Mortgage were entered into without authority, and in such circumstances, there is nothing to avoid or rescind.

4.  The Order 13 Application

4.1  It is common ground that the Default Judgment was obtained regularly. As such, it is incumbent upon Joy Rich to demonstrate that its defence has a real prospect of success.

4.2  As I understand the arguments on the merits, there are essentially the following areas in contention:

(1)  On Joy Rich’s own case, whether there is a viable case for breach of fiduciary duties;

(2)  Whether the clean-hand requirement and the doctrine of restitutio in integrum have the effect of barring Joy Rich from obtaining relief.

4.3  Mr Chan’s arguments on fiduciary duties and the clean-hand requirement are both premised on Joy Rich’s own case that (1) the affairs of Joy Rich were at all material times managed by Lau giving directions and instructions to CYW which would be habitually followed and (2) the role of Winky was to convey Lau’s directions and instructions as a go-between and as agent of Lau, including asking CYW to sign different documents (including the documentations relating to the Fameway Loan Agreement and the Fameway Mortgage) for and on behalf of Joy Rich: SOC §10.

4.4  Specifically, Mr Chan submits that there is a distinction between (1) Joy Rich entering into the Fameway Loan Agreement and the Fameway Mortgage on the one hand and (2) the alleged subsequent siphoning off of the loan proceeds by Lau. The former, by reason of the matters stated in the preceding paragraph, involve transactions entered into with the full knowledge of the Chen Sisters, and in particular CYW who was at the material time the sole shareholder and sole director of Joy Rich.

4.5  In the above contexts, Mr Chan refers to some of the observations previously made by other judges (but all counsel accept that such observations are not binding on me):

(1)  DHCJ Kent Yee’s observation in the 29/5/17 Decision[4]:

“[23] I am not entirely without doubt about the validity of the purported defence, in particular given the Chen sisters’ own involvement in the alleged sham transactions…”

(2)  Harris J’s observation in his decision[5] dated 3 June 2019 in HCCW 146/2013[6] ([2019] HKCFI 1236):

“[23] … It maybe that Ben Lau misappropriated money received by the Company from Fameway (and the Chens say that the loans were, at his direction, paid by the Company to him), but that would not ipso facto deprive Fameway of a right to repayment…. I have not seen anything which indicates that the Chens suggest that the Applicants are not entitled to repayment of the sums they advanced even if the advances they made to the Company have subsequently been misapplied.”

4.6  In addition, even were Joy Rich able to satisfy the merit requirement, Mr Chan reminds me that that does not mean Joy Rich has an automatic entitlement to have the Default Judgment set aside. Mr Chan places particular emphasis on the delay in the Order 13 Application.

4.7  I now proceed to deal with the above issues.

(i)  Whether breach of fiduciary duties

4.8  Joy Rich’s legal case runs as follows:

(1)  A company director only has actual authority to act in a manner which is in the interests of his company. If he acts in a manner which is contrary to the interests of his company, his actions will be without authority: Hopkins v TL Dallas Group [2005] 1 BCLC 543 at §§88;

(2)  A counterparty can only rely upon the doctrine of apparent authority if he does not know that the director has no actual authority: Thanakharn Kasikorn Thai Chamkat (Mahachon) v Akai Holdings (No 2) (2010) 13 HKCFAR 479 at §62;

(3)  Attribution of the state of mind of an agent to a corporate principal may be appropriate where the agent is the directing mind and will of the company for the purpose of performing the particular function in question: Bilta (UK) Ltd (in liquidation) v Nazir [2016] AC 1 at §67;

(4)  No act done by an agent in excess of actual authority is binding on the principal with respect to persons having notice that in doing the act the agent may be exceeding the agent’s authority: Bowstead & Reynolds at §8-047. As Nourse LJ put it in Heinl v Jyske Bank [1999] Lloyd’s Rep Bank 511 at 521, “If no contract comes into existence, there is nothing to avoid or rescind, nor can any property pass under it”;

(5)  In addition, a contract entered into by a director in breach of fiduciary duty is voidable. Where a contract is entered into not with the wrongdoer himself, but with another party, rescission as against the counterparty by reason of a wrong done by that third party wrongdoer will be available if the counterparty had knowledge of the wrongdoing such that his conscience is affected by it: Civil Fraud: Law, Practice & Procedure (1^st Ed) at §§22-036 & 22-042.

4.9  In Fameway’s two sets of Skeleton Submissions (dated 23 and 27 May 2024), Mr Chan did not articulate in clear terms his position on the legal propositions advanced by Joy Rich. At my request, Mr Chan at the hearing handed up a list of bullet points to articulate his contentions that there was no breach of fiduciary duties. His arguments run as follows:

(1)  CYW was at the material time the sole shareholder and director of Joy Rich;

(2)  Winky was in a romantic relationship with Lau and conveyed Lau’s directions to CYW which would habitually be followed;

(3)  As such, the Chen Sisters were parties to and/or were involved in the Alleged Scam Transactions;

(4)  All the directing minds (ie the Chen Sisters and Lau) had knowledge and consented to the Alleged Scam Transactions;

(5)  Therefore, there must have been actual authority in the carrying out of the Alleged Scam Transactions;

(6)  The interests of Joy Rich must be determined by reference to its shareholders and creditors. There was no breach of fiduciary duties since the sole shareholder (CYW) consented to the Fameway Loan and the Fameway Mortgage and no other creditor complained (other than the Chen Sisters who could not have defrauded themselves).

4.10  Mr Chan did not cite any authorities in support of his contentions.

4.11  Mr Man’s submissions in reply were in summary as follows:

(1)  As the Fameway Loan and Fameway Mortgage were executed to enable Lau to siphon off the loan proceeds for his own purpose and benefit, they could not be transactions entered into honestly in pursuit of Joy Rich’s success and therefore CYW (who just followed Lau’s instructions and furthered his purposes) did not have actual authority to enter into the Fameway Loan and Fameway Mortgage on behalf of Joy Rich;

(2)  It is incorrect that all concerned parties had made a unanimously-informed decision to enter into the Fameway Loan and Fameway Mortgage. Under the Re Duomatic principle, the unanimous, informal assent of all the members of a company can bind the company. However:

(a)  The shareholders who are said to have assented must have the appropriate or full knowledge of the relevant matter: EIC Services Ltd v Phipps [2004] 2 BCLC 589 at §134;

(b)  Further, there is a public policy exception that the Re Duomatic principle would not apply where the shareholders in ratifying the directors’ act were acting dishonestly or using the company as a vehicle for fraud or wrongdoing: Liquidator of Wing Fai Construction Co Ltd v Yip Kwong Robert [2018] 1 HKC 472 at §§269-271. G Lam J (as he then was) said:

“[271] It is true that both Bowthorpe Holdings and Madoff Securities are only decisions holding there was a serious issue to be tried on the application of the Duomatic principle, and I have some reservation whether the exception applies whenever the transaction may be said to be not in the best interests of the company, but the principle seems to me to be a sound one at least in respect of a dishonest and criminal transaction. It is also stated in Gore Browne on Companies at §§8[1] & 8[20] that a company cannot ratify an illegal transaction…”

4.12  In my view, Joy Rich’s legal case on breach of fiduciary duties has a real prospect of success, for the following reasons. As submitted by Mr Man, in the Order 13 Application, I am not required to make a definitive determination on the correctness of Joy Rich’s legal case. My analysis below sets out a provisional view.

4.13  First, in analyzing the interests of Joy Rich, one should not take a blinkered view and segregate (1) Joy Rich entering into the Fameway Loan Agreement and the Fameway Mortgage on the one hand and (2) what happened subsequently to the loan money. It is true that pursuant to the loan transaction Joy Rich did receive the loan proceeds. However, as submitted by Mr Man, it is Joy Rich’s case that Lau was using Joy Rich as a vehicle to defraud and siphon off monies from Fameway for his own benefit (and not that of Joy Rich). The Fameway Loan Agreement and the Fameway Mortgage were simply instrumental steps in the furtherance of Lau’s purpose.

4.14  Secondly, even proceeding on the assumption that CYW (whose asset under the Re Duomatic principle is relevant) was not ignorant of the details and purpose of the loan transactions, the public policy exception explained in Wing Fai §271 should be applicable.

4.15  Thirdly, in so far as it is suggested by Mr Chan that the Re Duomatic principle has no application in the present case on the basis that Joy Rich was a one-man company (and CYW being the sole shareholder and director had assented to the Alleged Scam Transactions), there is still the further question of whether CYW’s conduct (on the basis that she was aware of Lau’s purpose) should be attributed to Joy Rich (§4.8(3) above). As noted above, Mr Chan has not provided any authorities to support his contention. But the cases appear to suggest that Mr Chan’s propositions are far from being uncontroversial.

4.16  I refer to the Supreme Court’s judgment in Singularis Holdings Ltd v Daiwa Capital Markets Europe Ltd [2018] EWCA Civ 84 which considered the Bilta case relied on by Mr Man. The issues in Singularis were identified as follows:

“[9] Daiwa now appeals to this Court on the question of attribution and its consequences. Two broad issues arise. (1) When can the actions of a dominant personality, such as Mr Al Sanea, who owns and controls a company, even though there are other directors, be attributed to the company? (2) If they are attributed to the company, is the claim defeated (i) by illegality; (ii) by lack of causation because the bank’s duty of care does not extend to protecting the company from its own wrongdoing or because the company did not rely upon its performance; or by an equal and countervailing claim in deceit?”

4.17  On the issue of attribution, the Supreme Court analyzed the relevant authorities (including Bilta) and said as follows:

“[26] Daiwa argues that, as Singularis was effectively a one-man company and Mr Al Sanea was its controlling mind and will, his fraud is to be attributed to the company, with the consequence that its Quincecare claim against Daiwa is defeated, either by illegality, or for lack of causation, or because of an equal and opposite claim for the company’s deceit. To examine such an assertion, it is necessary to go back to basic principles.

[27] The starting point has to be the principle established by the House of Lords in Salomon v A Salomon and Co Ltd [1897] AC 22, that a properly incorporated company has an identity and legal personality quite separate from that of its subscribers, shareholders and directors. Mr Salomon had established the company, with his family, to buy his boot and shoe manufacturing business at a time when it was solvent. When it later became insolvent, he was entitled to enforce the debentures granted by the company in part payment of the price and he was not obliged to indemnify the company against the claims of its creditors. It is also worth recalling the words of Lord Macnaghten, at p 53, that “It has become the fashion to call companies of this class ‘one-man companies’. That is a taking nickname, but it does not help one much in the way of argument”.

[28] Companies being fictional persons, they have of course to act through the medium of real human beings. So the issue is when the acts and intentions of real human beings are to be treated as the acts and intentions of the company…. For this, the ordinary rules of agency and vicarious liability, which apply to natural persons just as much as to companies, will normally supply the answer. However there will be some particular rules of law to which neither of these principles supplies the answer. The question is not then one of metaphysics but of construction of the particular rule in question.

[30] Stone & Rolls has prompted much debate and criticism. It was analysed in detail by a panel of seven Justices of this Court in Bilta (UK) Ltd v Nazir (No 2) [2015] UKSC 23; [2016] AC 1. The company and its liquidators brought claims against its directors and others who were alleged to have dishonestly assisted the directors in a conspiracy to defraud the company. The claim was defended on the basis that the fraud of its directors was attributable to the company which could not then make a claim against the other conspirators relying on its own illegality. This court held unanimously that The court explained that the key to any question of attribution was always to be found in considerations of the context and the purpose for which the attribution was relevant…

[31] Stone & Rolls was a case between a company and a third party. Lords Toulson and Hodge, after analysing the judgments in detail, reached the conclusion (para 154) that “it should be regarded as a case which has no majority ratio decidendi. It stands as authority for the point which it decided, namely that on the facts of that case no claim lay against the auditors, but nothing more”. Lord Sumption identified three points for which it was authority (para 80), but Lord Neuberger, with whom Lord Clarke and Lord Carnwath agreed, agreed with only two of these (para 26). The first was that an illegality defence cannot be run by a third party against a company where there are innocent shareholders or directors. The second was that the defence was available, albeit only on some occasions, where there are no innocent directors or shareholders...

[33] Unfortunately, the majority’s acceptance of the second point has been treated as if it established a rule of law that the dishonesty of the controlling mind in a “one-man company” could be attributed to the company - with the consequences discussed earlier - whatever the context and purpose of the attribution in question. Thus there was much argument in this case about what was meant by “innocent” directors and whether this included innocent but inactive directors who should have been paying more attention to what Mr Al Sanea was doing. The judge found that Singularis was not a one-man company in the sense that the phrase was used in Stone & Rolls and Bilta (Rose J, para 212). The company had a board of reputable people and a substantial business. There was no evidence to show that the other directors were involved in or aware of Mr Al Sanea’s actions. There was no reason why they should have been complicit in his misappropriation of the money (para 189). The Court of Appeal held that, on those findings of fact, she had made no error of law (CA, para 54).

[34] I agree. But in any event, in my view, the judge was correct also to say that “there is no principle of law that in any proceedings where the company is suing a third party for breach of a duty owed to it by that third party, the fraudulent conduct of a director is to be attributed to the company if it is a one-man company”. In her view, what emerged from Bilta was that “the answer to any question whether to attribute the knowledge of the fraudulent director to the company is always to be found in consideration of the context and the purpose for which the attribution is relevant” (para 182). I agree and, if that is the guiding principle, then Stone & Rolls can finally be laid to rest.” (emphasis added)

4.18  I am cognizant that Singularis deals with a Quincecare claim against Daiwa, and hence the proposition there derived is that there is no principle of law that in any proceedings where the company is suing a third party for a breach of a duty owed to it by that third party, the fraudulent conduct of a director is to be attributed to the company if it is a one-man company. But it seems to me that Singularis, like Bilta, is an authority for at least the proposition that the key to any question of attribution is always to be found in considerations of the context and the purpose for which the attribution is relevant.

4.19  As Mr Man emphasizes, the context in the present case is that Lau was the shadow director of both the lender (Fameway) and the borrower (Joy Rich) and the transactions were into for a wrongful purpose. In my view, the answer to any question on attribution is far from straightforward, complicated by the factual dispute on whether CYW was aware of such wrongful purpose. But even were CYW aware of the wrongful purpose, the issue of attribution still involves a fact-sensitive consideration of its context and purpose. In my view, the issue is plainly not as straightforward as Mr Chan has portrayed it to be.

4.20  For the above reasons, I find that Joy Rich’s legal case on breach of fiduciary duties has crossed the merit threshold of having a real prospect of success.

(ii)  Whether bar to relief

4.21  As I understand Mr Chan, he takes two points.

4.22  First, it is Fameway’s case that Joy Rich’s claimed relief for rescission and injunction (to prevent Fameway from selling the Property or otherwise from enforcing the Fameway Mortgage) are equitable in nature. As Joy Rich only acts through human agents, therefore when all the directing minds (the Chen Sisters and Lau) did not come with clean hands, such “unclean” state of mind should be attributed to Joy Rich. Mr Chan’s argument presupposes that any “uncleanliness” of the Chen Sisters and Lau should be attributed to Joy Rich. For the reasons set out at §§4.17 to 4.20 above, this issue is far from straightforward.

4.23  In any event, I accept Mr Man’s submission that any alleged bar has no application to Joy Rich’s contention that the Fameway Loan Agreement and the Fameway Mortgage are not binding on Joy Rich for want of authority.

4.24  Secondly, Mr Chan says that the doctrine of restitutio in integrum comes into play and the Fameway Loan Agreement and the Fameway Mortgage can only be set aside if the loan proceeds (HK$81 million) can be returned to Fameway which he says Joy Rich is unable to do. I accept Mr Man’s submissions that it is arguable that counter-restitution is not required and restitutio in integrum does not operate as a bar, where the rescinding plaintiff’s inability to return the benefits is the result of the defendant’s wrongdoing: Crown Master International Trading Co Ltd v China Solar Energy Holdings Ltd [2015] 4 HKC 505 at §56 (Au-Yeung J).

4.25  For the above reasons, I am of the view that Joy Rich has demonstrated a defence which has a real prospect of success. However, Fameway contends that I should nevertheless, in the exercise of my residual discretion, decline to set aside the Default Judgment.

(iii)  Delay

4.26  Fameway relies on Young Bing Ching (deceased) v Chow Yung Fong & Anor [2001] 2 HKLRD 394. Recorder Ma SC (as he then was) said at 402C to 403B:

“The starting point in this discussion is that where there has been a regular default judgment, the primary consideration for the court will be the merits of the defendant’s case. In most cases, the determination of this aspect will be determinative of the application to set aside….

Exceptionally, however, despite being able to demonstrate sufficient merits in his defence, a defendant might not be permitted to have the default judgment set aside. In my judgment, the fact that a defendant is able to demonstrate a defence of sufficient merit does not mean he has an automatic entitlement to have the default judgment set aside…

The court is in my view entitled, indeed obliged, to exercise its discretion under O.13 r.9 with regard to all the relevant circumstances… What will be relevant as a factor in any particular case will of course depend on the individual facts of that case, and these other relevant factors will then have to be weighed against the dominant factor of the merits in order to see where the justice of the case lies…”

4.27  Fameway relies on the fact that the Order 13 Application was taken out more than 10 years after the Default Judgment was granted. In Young Bing Ching, the learned Recorder declined to set aside a default judgment since (1) third party rights might have been affected and (2) prejudice was caused in the form of the demise of the plaintiff in that case.

4.28  In my view, I do not believe the delay in the present case, on a proper analysis, has like or similar effect as that in Young Bing Ching. I agree with Mr Man that there are no exceptional circumstances in the present case to outweigh the dominant factor of the merits, for the following reasons:

(1)  In the present case, Fameway has not taken any steps to enforce the Fameway Mortgage until April 2022;

(2)  Any alleged prejudice is illusory. The issues concerning the validity of Joy Rich’s loans have been litigated in multiple proceedings (in particular the Contribution Claim commenced in 2017, which was ready for trial) and Lau’s camp (including Fameway) must have been aware of the dispute for a long time and parties must have retained all the relevant documents.

5.  Fameway’s Application

5.1  There is no real dispute between counsel on the principles applicable to strike-out application. They are set in, for example, in Yifung Properties Ltd v Manchester Securities Corp, HCA 1341/2014, 19 October 2015 §§10-15. In summary: (1) a pleading should be struck out only in clear and obvious cases, (2) where the limb of lack of reasonable cause of action is relied on, no evidence is admissible, (3) a proceeding is “frivolous” when it is not capable of reasoned argument, without foundation or where it cannot possibly succeed, (4) a proceeding is “vexatious” when it is oppressive or lacks bona fides, (5) to decide that the litigant has been frivolous or vexatious and thus abused the process of the court is a serious finding to make, for it will generally involve bad faith on his part and one would expect the discretion to be sparingly exercised.

5.2  In so far as the Fameway’s Application is premised on the viability of Joy Rich’s (legal) claim already considered above in the context of the Order 13 Application, I adopt the same analysis here.

5.3  The additional factors relied on by Fameway are:

(1)  It is said that Joy Rich’s claim is vexatious in the sense that it lacks bona fides on the part of the Chen Sisters. Fameway relies on Honour Holdings Limited’s (“HHL”) decision not to resist Fameway’s claim in HCA 891/2013 although HHL advanced grounds similar to those advanced by Joy Rich. HHL is beneficially owned by Winky. Where, as here, I have found that Joy Rich has crossed the more “onerous” merit threshold under the Order 13 Application, it seems to me that I should be slow to find that Joy Rich’s claim lacks bona fides. Further, as pointed out by Mr Man, Fameway’s claim against HHL is comparatively smaller and is not secured by the Property;

(2)  It is said that Joy Rich’s claim is vexatious and an abuse of process because it involves the Chen Sisters maintaining 2 separate legal actions on the same subject matter and the same claim against Fameway. I do not agree. HCA 510/2012 was not an action commenced by Joy Rich and does not involve a claim of breach of fiduciary duties against Lau. Whilst I accept that once the Default Judgment is set aside, it is open to Joy Rich to make a counterclaim in HCA 510/2012, I agree with Mr Man that any overlapping issues may be dealt with by appropriate case management powers to order the proceedings to be consolidated and heard together (perhaps even with HCMP 430/2013);

(3)  Mr Chan appears to suggest that the SOC should be struck out for disclosing no reasonable cause of action, on the basis that there is a lack of particulars on how Fameway is said to have been imputed with the knowledge of the Alleged Scam Transactions. I accept Mr Man’s submissions that it is tolerably clear from the SOC that Joy Rich’s pleaded case is that Lau’s knowledge of the scheme is attributable to Fameway as he was the directing mind and will of Fameway for the purpose of the Fameway Loan Agreement and the Fameway Mortgage. It seems to me that any alleged lack of particulars is not a reason to strike out the SOC: Hong Kong Civil Procedure 2024 Note 18/19/5.

6.  Lau’s Application

6.1  At the hearing, Mr Co confirmed that Lau relies only on the no reasonable cause of action ground and the frivolous ground. The arguments advanced by Mr Co are essentially permutations of those considered under the discussions set out above on breach of fiduciary duties. For the reasons there stated, I do not agree with Mr Co that the claim against Lau should be struck out.

6.2  In any event, I further agree with Mr Man that even had I declined to set aside the Default Judgment, Joy Rich’s case against Lau for his breach of fiduciary duties is maintainable. As noted at Singularis §30, the applicable legal proposition appears to be as follows: Where a company has been the victim of wrongdoing by its directors (in Lau’s case a shadow director), the wrongdoing of the directors cannot be attributed to the company as a defence to a claim brought against the directors - and their co-conspirators - by the company’s liquidator for the loss suffered by the company as a result of the wrongdoing.

7.  Conclusion

7.1  For the above reasons, I set aside the Default Judgment. I also accede to Mr Man’s suggestion that no order is required to be made on Fameway’s Application.

7.2  I dismiss Lau’s Application.

7.3  As invited by Mr Man and Mr Chan, I direct Joy Rich and Fameway to lodge written submissions on costs. Joy Rich is to lodge its submissions (limited to 10 pages) within 7 days hereof and Fameway its submissions (limited to 10 pages) within 7 days thereafter. Subject to any further directions, I will then deal with the issue of costs on the Order 13 Application and Fameway’s Application on the papers.

7.4  I make a costs order nisi that Lau is to pay to Joy Rich the costs of Lau’s Application with a certificate for 2 counsel to be summarily assessed. Joy Rich and Lau are to propose joint directions for paper disposal within 3 days hereof.