HCA 361/2021
[2024] HKCFI 572
IN THE HIGH COURT OF THE
HONG KONG SPECIAL ADMINISTRATIVE REGION
COURT OF FIRST INSTANCE
ACTION NO 361 OF 2021
________________________
BETWEEN
REMX LIMITED
Plaintiff
and
LAE TECHNOLOGIES HONG KONG LIMITED
1st Defendant
LEGACY TRUST COMPANY LIMITED
2nd Defendant
________________________
Before: Master Alexander Tang in Chambers (Open to Public)
Date of Hearing: 14 February 2024
Date of Decision: 27 February 2024
_________________________________
DECISION
_________________________________
A. Introduction
1. This is D2’s application to strike-out P’s Amended Statement of Claim (the SoC ) taken out on 19 Oct 2023.
2. D2’s case, in gist, is that the various causes of action and prayer for relief are unsustainable and bound to fail.
3. On the eve of the hearing, two additional Summonses were filed:-
(a) On 7 Feb 2024, P filed a Summons for the putting in of a further Affirmation by Eghosasere Nehikhare, an Executive Director of P, to confirm the contents of the 3rd Affidavit of Adriel Wong Yan Wai, a solicitor acting for P, being the affirmation in opposition to the strike-out Summons (the first Summons ).
(b) On 8 Feb 2024, P filed an application by way of Summons to adjourn the strike-out application sine die , pending an application to amend the SoC to be made within 28 days (the second Summons ).
4. I dealt with these at the beginning of the hearing. After hearing parties, I granted the first Summons and dismissed the second Summons.
5. I granted the first Summons because the further Affirmation includes nothing new – instead, it is only there to meet the complaint put forward by D2 that the evidence in opposition currently filed by P is sworn by the solicitor, rather than the client. It does nothing but confirm that the contents of the affirmation as put forward by the solicitor are also true from the client’s perspective. I therefore grant leave as per §1 of the Summons. Costs should in principle be in the cause of the strike-out Summons (as dealt with below), to be summarily assessed.
6. As to the second Summons:-
(a) According to P, its application to adjourn is based on the fact that it has, shortly before the hearing, expressed the wish to further amend its SoC; and that, as a matter of case management, it would make sense for this Court to wait for the new draft re-amended SoC to come out. It is said that information has come to light recently in January 2023 which justifies the belated application.
(b) D2 of course strenuously opposes the application, noting that any attempt to resist strike-out based on amendment should normally be done with a properly particularized draft pleading. It was also pointed out that there was no specificity as to the information said to have come to light recently; in fact, the last available piece of new information was the new list of documents filed in October 2023, and thus the delay is simply unexplained.
(c) I agree with D2. No coherent basis had been put forward to justify an adjournment at the 11th hour. The second Summons should therefore be dismissed. Costs should follow the event, ie, P should pay D2’s costs of the Summons, with certificate for Counsel, to be summarily assessed.
B. Preliminary Point – Strike Out under O 18, r 19(1)(a) Only?
7. As a preliminary point, P argued that D2 should only be allowed to rely on strike out under RHC O 18, r 19(1)(a), as opposed to the other grounds, because D2 only relied upon the “no reasonable cause of action ” ground in its application; this Court is therefore asked to disregard the evidence.
8. I find this argument slightly perplexing.
(a) The Summons is very clear that D2 is relying on more than ground (1)(a) - §1 of the Summons makes it very clear that there are three grounds of strike-out, including that the SoC is “scandalous, frivolous or vexatious ” and that the SoC is “otherwise an abuse of the process of the Court ”.
(b) The Summons is also
(i) which causes of action D2 thinks P is advancing [§13];
(ii) why D2 thinks P’s causes of action against it are unsustainable, in particular, that D2 is of the view P’s suggestion that D2 had knowledge of the alleged fraud is unsustainable as a matter of fact. D2’s case is that it did not know about the dealings between P and D1 prior to the emails P sent to D2 [§§15-25] (the Timing Point ).
(c) It therefore seems fairly clear to me that the strike-out Summons is not limited to a ground (1)(a) strike out. Indeed, P filed evidence in opposition. P’s Skeleton also referred to the fact that a strike-out can be founded on the basis that P’s case has no factual basis (see §5), and relied upon the Timing Point as well (see §12).
9. This objection therefore has no merit.
C. The Claims in the SoC
10. Moving on to the substantive strike-out, it is apt to understand what the SoC is about. As pleaded, P alleges the following:-
(a) On 14 Nov 2020, P entered into a “Coin Management and Custody Agreement ” (CMCA ) with D1 for the provision of crypto services [§3].
(b) On 17 Nov 2020:-
(i) D1 introduced P to Legacy Trust NA, on the basis that Legacy Trust NA would receive the funds payable to D1 pursuant to the CMCA [§§21-23].
(ii) Bank details of D1’s account with D2 were provided for the payment of funds. At the time, P thought that D2 was part of the Legacy Trust NA group [§25], although it later found out this was untrue [§26].
(c) On 20 Nov 2020, P transferred US$12 million pursuant thereto (the Transfer Funds ) [§9]. The amount was paid to an account kept by D2 with ANZ bank, as this was what D1 told P to do [§8A].
(d) However, D1 then claimed there were difficulties in utilizing the monies, presumably due to the fact that the monies were earmarked for crypto transactions [§11].
(e) P and D1 then entered into a “Distribution Agreement” (the DA ) “to allow for a more straightforward transfer of funds to D1 under the CMCA…which on its face appeared to be an agreement between [D1] and [P] by which [D1] granted [P] the right to distribute certain software… ”[§17], so that “payments made pursuant to the CMCA, such as the [US$12 million herein]…could be presented when desirable as if they have been made pursuant to the [DA] ” [§18]. It is P’s position that this is in effect a sham, and the DA “void and/or invalid ” [§20(1)].
(f) By 1 Dec 2020, however, D1 wanted to cancel the transaction. This was however initially refused by P [§11A].
(g) By 8 Dec 2020, however, P had decided that it was better for the Transfer Funds to be returned and asked D1 for a refund [§12].
11. However, this had not taken place. P claims that, as against D1, the Transfer Funds [§13]:-
(a) “were and remained the property of [P] and [P] became entitled to the immediate return of the Transfer Funds. Pending the return by [D1]…[D1] holds the Transfer Funds on constructive and/or resulting trust and/or Quistclose trust for [P] and [D1] must account to [P] for the Transfer Funds ”.
(b) “Further or in the alternative, [D1] has been unjustly enriched at the expense of [P] by the retention of the Transfer Funds and [P] is entitled to an order for restitution ”.
12. P then pleads its case against D2.
(a) On 11 Dec 2020, P sent an email to D2, informing D2 that it was terminating its relationship with D1, and that it was recalling the Transfer Funds urgently [§27]. D2 replied, saying it would respond as soon as possible within 1-2 business days [§28].
(b) No response was given. As such, on 14 and 15 Dec 2020, P again emailed D1, seeking a response [§§29-30]. No response was received [§31].
(c) On 17 Dec 2020, P’s bank issued a SWIFT recall notice to Citibank NA, the correspondent bank that transferred the Transfer Funds to D2’s account with ANZ, noting that P was “on the edge of being defrauded ”.
(d) On 28 Dec 2020, Citibank noted that D2’s account with ANZ was frozen by way of a HK Court injunction granted by DHCJ MK Liu [§33].
(e) On 11 Jan 2021, DHCJ William Wong SC uplifted the injunction [§34].
(f) On 18 Jan 2021, P’s bank again issued a further SWIFT recall notice to Citibank [§34].
(g) On 4 Feb 2021, Citibank responded by SWIFT that ANZ had advised that the recall required a “debit authority from [D2] ”. P says it should be inferred from this response that the Transfer Funds remained within D2’s account kept with ANZ at the time [§35].
(h) Notwithstanding so, D2 released the Transfer Funds to [D1] at some time after 4 Feb 2021 [§37].
13. On this basis, the following allegations were made against D2:-
(a) “Once [D2] was on notice that [P] had terminated its relationship with [D1]…and that [D1] had requested a recall of the Transfer Funds…[D2] had no basis nor right to transfer the Transfer Funds to [D1], and held the same on trust ” [§39]
(b) “Alternatively, once [D2] was on notice that [P] had terminated its relationship with [D1]…[D2] held the Transfer Funds on Quistclose trust ” [§39]
(c) “Further , by receipt of the Transfer Funds and by reason of the knowledge of [D2] pleaded in paragraph 36 above, [D2] was unjustly enriched ” [§40]
(d) “If, in the alternative, [D2] held the Transfer Funds as agent ”
(e) “… by failing to return the Transfer Funds to [P] on request and/or by transferring the same to [D1], [D2] dishonestly assisted [§§42-43]
14. Based on this, it appears that P relies upon the following causes of action against D2:-
(a) constructive and/or resulting trust;
(b) Quistclose trust;
(c) unjust enrichment;
(d) some kind of agency related claim; and
(e) dishonest assistance.
15. At the hearing, it appears that Mr Brown does not really regard agency as a separate cause of action. I will therefore focus on the other 4 causes of action and determine:-
(a) whether the pleadings of these causes of action are sustainable;
(b) even if the pleading were not sustainable, whether it can potentially be curable by way of amendment. This is because Mr Brown has impressed upon me that, even if I were not satisfied that the pleading is currently sustainable, I can still give an opportunity to amend.
D. Unjust Enrichment
16. I start with unjust enrichment first as this is a cause of action which Mr Brown suggests he stands on the firmest ground.
17. Mr Cheung’s complaints against this plea, in gist, are that:-
(a) the 3 core elements of unjust enrichment (enrichment, at the expense of, unjust factor ) had not been pleaded;
(b) in any event, D2 is a licensed trustee company and holds the moneys it received on trust for its clients, including D1. There can be no enrichment . In particular, Mr Cheung relies on the CFA case of Shanghai Tongji Science & Technology Industrial Co Ltd v Casil Clearing Limited (2004) 7 HKCFAR 79 at §73, where Ribeiro PJ had this to say:-
“The interposed banks merely provide the mechanism for making payment to Casil under the L/C. They were not intermediate recipients unjustly enrichment. As the Australian High Court indicated in Australia and New Zealand Banking Group v Westpac Banking Corporation …a restitutionary claim generally does not lie against an intermediary who is no more than “a mere conduit-pipe” for payment to the ultimate recipient. ”
(c) there is no valid plea of an unjust factor , nor is there any plea that D2 is aware of any such unjust factor .
18. My views are as follows.
19. The element of at the expense of has been pleaded and should not be in dispute.
20. As to enrichment , the fact that D2 received the monies had been pleaded, and in that sense there is prima facie enrichment . The issue is whether that plea is sufficient, especially when D2 argues that it had not received such for itself – instead, D2 is at pains to stress that it stands in the position analogous to a bank, being a mere intermediary or conduit pipe as described in Shanghai Tongji . In such cases, D2 seem to suggest that P has to plead something more – ie, facts that support an argument that the receipt of payment translates to enrichment sufficient to justify a claim in unjust enrichment. My analysis is as follows.
(a) First , insofar as D2’s focus is on its status as trustee, this may not be determinative of the issue. A person who received assets on trust can still be sued for unjust enrichment. As the Privy Council held in Skandinaviska Enskilda Banken AB (Publ) v Conway [2020] AC 1111 at §89:
“A trustee who is not acting as an agent is enriched at common law by the payments which he receives, since the common law ignores the equitable interest of the beneficiaries. He can accordingly be an appropriate defendant in an action for the restitution of money paid to him as trustee.”
(b) Second , in my view, issues of intermediary/conduit-pipe are generally speaking matters uniquely within the knowledge of recipient/defendant, at least at the outset. Wherever the ultimate burden of proof lies on this issue, it would appear to me that it would be a strong thing to strike out a statement of claim simply because it does not elaborate on such an issue.
(c) In the circumstances, this is not a case whereby the plea of enrichment is so lacking that there is no reasonable cause of action on the pleadings.
21. If the plea is not bad on the pleadings per se , we are left with a strike-out on the facts – to succeed, D2 has to show that it is bound to win the enrichment point without going to trial. I do not accept such, for the following reasons.
22. First , the quoted passage from Shanghai Tongi is not clear and unequivocal. Ribeiro PJ simply said that “a restitutionary claim generally does not lie against an intermediary who is no more than “a mere conduit-pipe ” for payment to the ultimate recipient ”. This raises question of what “generally” or “mere conduit-pipe” means in this context. Mr Cheung did not elaborate on either point. I do not think that Shanghai Tongi can simply be applied without more careful consideration of the underlying cases.
23. Second , this area of law is dogged with contrary views and uncertainties. A quick survey would suffice for present purposes:
(a) The traditional English law view is perhaps best expressed in Portman Building Society v Hamlyn Taylor Neck [1998] 4 All ER 202 at 207, which requires payment over in good faith (and can be viewed as a bona fide change of position defence):-
“The true rule is that where the plaintiff has paid money under (for example) a mistake to the agent of a third party, he may sue the principal whether or not the agent has accounted to him, for in contemplation of law the payment is made to the principal and not to his agent. If the agent still retains the money, however, the plaintiff may elect to sue either the principal or the agent, and the agent remains liable if he pays the money over to his principal after notice of the claim.
(b) This is not very different from the view taken in Australia and New Zealand Banking Group v Westpac Banking Corporation [1988] HCA 17, 164 CLR 662 (cited by Ribeiro PJ in Shanghai Tongji ). The High Court had this to say at §§12 and 21:-
“12…when the person to whom the payment is directly made receives it as an intermediary (e.g. as agent for a designated principal), there may be uncertainty about the identity of the actual recipient of the benefit at the moment of payment. If the circumstances are such that the intermediary is to be seen as being himself the initial recipient of the benefit, his prima facie liability will ordinarily be displaced when he has handed not retained "the benefit of the windfall" but been "a mere conduit-pipe"
…
21… an agent who has received money on his principal's behalf will, without more, have a good defence if, before learning that the money was paid under fundamental mistake, he has "paid it to the principal or done something equivalent" thereto money is paid to an agent on behalf of a principal and the agent receives it in his capacity as such and, without notice of any mistake or irregularity in the payment, applies the money for the purpose for which it was paid to him, he has applied it in accordance with the mandate of the payer who must look to the principal for recovery
(c) A perhaps more modern view, however, is that the question is more fundamental – enrichment only occurs if there is a net transfer of value. In Test Claimants in the FII Group Litigation v Revenue and Customs Commissioners [2021] 1 WLR 4354, the UK Supreme Court had this to say:-
“169…it is not in dispute that unjust enrichment is designed to correct normatively defective transfers of value The recipient of the value transferred must have benefited, or in other words have been enriched, by the transfer of value
170...The question on this appeal is the measure of restitution: what was the Revenue’s enrichment?... But the Court in ascertaining the defendant’s enrichment cannot always conclude its enquiry by saying that because the claimant transferred £X to the defendant, the defendant’s enrichment is £X.
…
172. The point is also recognised in judicial authority. In Jeremy Stone Consultants Ltd v. National Westminster Bank plc [2013] EWHC 208 (Ch), Sales J [as Lord Sales of the UK Supreme Court then was] addressed a claim to recover from the defendant bank money which it was induced by a third party to pay into a company’s bank accounts when the company, unbeknown to the claimants, was part of the third party’s fraudulent Ponzi scheme. One of the claims against the bank was for restitution of the moneys in those accounts on the basis of NatWest’s unjust enrichment as a result of the moneys having been paid on the basis of a mistake. Sales J rejected the claim based on unjust enrichment on two grounds. First, he held that the defendant bank had not been enriched., He stated (para 242):-
"It is true that when the claimants paid sums to NatWest for the account of SEWL, NatWest received those sums and added them to its stock of assets as moneys to which it was beneficially entitled. However, the increase in its assets was matched by an immediate balancing liability
He held that the claimants’ unjust enrichment claim properly lay against the company , whose assets were increased by the payments into its bank accounts. Secondly, even if there had been enrichment, he held that the bank had a defence of good faith change of position and a defence of ministerial receipt ,
24. These differing views mean that there is much uncertainty in this area of law. The differences are not minor. For example, if the Supreme Court’s views are accepted:-
(a) The issue goes to enrichment , an element of the cause of action, as opposed to a defence. This may affect the burden of proof.
(b) The focus of the inquiry is on the nature status
(c) The state of mind of the recipient may no longer be relevant (ie, whether or not he or she acted bona fides ).
(d) Finally, the recipient may not need to establish payment over/change of position.
25. Until these complicated issues are properly resolved, however, it would appear to me inappropriate to strike out on the assumption that the law goes one way or the other. This is especially the case when (i) these law points had not been properly ventilated; (ii) on the facts, D2’s position is rather special – it is not a bank per se but a trustee company; and (iii) on the evidence before me, I am not satisfied that it is as clear as night follows day that D2 must have been regarded as having bona fide changed its position/paid over (see §45 below).
26. Moving on to the element of unjust factor , my views are as follows.
(a) Mr Brown suggests that such has been pleaded – as it had been alleged that “[D2] provided no consideration for the Transfer Funds ”. Based on this, he argues that “Receiving money without consideration is prima facie unjust but is subject to defences that D2 may raise and argue at trial ”.
(b) I respectfully disagree. While it is true that an established unjust factor is total failure of “consideration ”, the word “consideration ” has a specific meaning, ie, it means that the basis upon which the payment was made – and thus total failure of consideration means that the basis upon which the payment was made has somehow failed: see Shanghai Tongji at §79. Here, the basis of the payment is, on P’s case, the CMCA; and D2 is not even a party to such; it is thus questionable whether or not this unjust factor is even available, at least when D2 has no knowledge of the CMCA at the relevant time of the supposed enrichment: see Goff & Jones (10th Edition) at §13-06. In any event, even if this unjust factor were available, the current plea that “[D2] provided no consideration for the Transfer Funds ” (see §13(c) above) simply misses the point – it has nothing to do with the basis upon which the payment was paid.
(c) As such, it does appear to me that the SoC, as currently pleaded, is demurrable for the lack of a proper plea of an unjust factor .
E. Constructive and/or Resulting Trust
27. Moving on, then, to the constructive/resulting trust claims, D2’s complaint is rather simple:-
(a) On P’s case , what is pleaded is that:-
(i) P wished to terminate the CMCA and asked for the return of the Transfer Funds when it became clear that D1 was unable to provide the cryptocurrency services it promised (see §10(g) above);
(ii) It is then asserted that from that point onwards, D1 somehow became a trustee of the Transfer Funds for P (see §11(a) above);
(iii) It is then somehow said that, upon D2 having notice of P’s termination of its relationship with D1, D2 is also a trustee of the Transfer Funds for P (see §13(a) above).
(b) If so, no constructive or resulting trust can arise based on the dicta in Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] AC 669. As Lord Goff reminds us at 689H:-
“First, there is no general rule that property in money paid under a void contract does not pass to the payee; and it is difficult to escape the conclusion that, as a general rule, the beneficial interest in the money likewise passes to the payee. This must certainly be the case where the consideration for the payment fails after the payment is made or breach of contract
(c) The same comment is made, more recently, in Angove Pty Ltd v Bailey [2016] 1 WLR 3179 by Lord Sumption JSC at §30:-
“For present purposes it is enough to point out that where money is paid with the intention of transferring the entire beneficial interest to the payee, the least that must be shown in order to establish a constructive trust is (i) that that intention was vitiated, for example because the money was paid as a result of a fundamental mistake or pursuant to a contract which has been rescinded , or (ii) that irrespective of the intentions of the payer, in the eyes of equity the money has come into the wrong hands, as where it represents the fruits of a fraud, theft or breach of trust or fiduciary duty against a third party . One or other of these is a necessary condition, although it may not be a sufficient one. Neither of them was satisfied in the Neste Oy case. In particular, the prospect of a total failure of consideration, however inevitable, is not a circumstance which could have vitiated the intention of the shipowner to part with its entire interest in the money. purely personal obligations
28. In my view, D2’s objections are valid.
29. P’s case, as pleaded, is simply a payment made pursuant to the CMCA, which it subsequently wished to terminate as D1 did not provide cryptocurrency services. Vis-à-vis D1, therefore, the above principles apply and there could be no trust whereby D1 holds the Transfer Funds for P. If D1, the more proximate party, does not hold anything on trust, it seems difficult to see how D2, the more remote party, would suddenly become a trustee.
30. It appears that P did not really have an answer to this point per se . Instead, Mr Brown’s answer is that he would need to amend to introduce a different case. In his Skeleton, he mentioned as follows:-
“39. …While it is P’s case that this is a simple claim in contract that is not how the case has developed. D1 has pleaded that the Payment was pursuant to the Distribution Agreement and P is now aware that D1 told D2 that the Payment was pursuant to the Distribution Agreement…
40…P will plead the Payment was induced by D1’s fraudulent misrepresentation that the Distribution Agreement was not a genuine contract
31. Two observations can be made.
32. First , Mr Brown’s submissions seem to tacitly accept that, as pleaded, its claims of constructive/resulting trust in the SoC are not sustainable – thus there is a need to adopt a new case which P “will plead ”.
33. Second , the new case, it seems, is far from straightforward:-
(a) For one thing, it is inconsistent with P’s own case . P’s own case is that the payment was made pursuant to the CMCA – the Distribution Agreement is, to put it euphemistically, a device to “allow for a more straightforward transfer of funds…under the CMCA ” [SoC §17] but is not intended to be of legal effect. If so, there can be no fraudulent misrepresentation – on P’s own case , the Distribution Agreement is not a legally effective contract. While it is true that D1, in related proceedings, appear to be asserting that the Distribution Agreement is genuine, this is, in a way, potentially neither here nor there – the litmus question is an a priori one, ie whether or not P can successfully plead such an inconsistent alternative without being accused of blowing hot and cold: see Chan Chun Chuen v Kao Lee & Yip (HCA 597/2015, 12 Oct 2017 at §30(4).
(b) Further, it is not clear whether, and if so, when it could be said that D2 would have sufficient knowledge of this purported fraud such that its conscience would be affected in the Westdeutsche sense:-
(i) In his Skeleton (§§41-52), Mr Brown highlighted to me a number of documents which seem to suggest that D2 had various know-your-client or anti-money laundering concerns in relation to the receipt of the payment and the Distribution Agreement (which is described as wholly uncommercial with a 50-year term of distribution rights for software); and that but for D2 turning a blind eye, it would have discovered that something was amiss even before it received the Transfer Funds.
(ii) However, these issues have nothing to do with the alleged fraud. The alleged fraud rests on D1 disclaiming its previous agreement with P that the Distribution Agreement is only a “device” which is legally ineffective. However, on P’s own case , this device was something it was privy to and “agreed to sign ”. Even had D2 done further due diligence with P, P would in all likelihood have simply continued to tell D2 that the payment was truly made pursuant to the Distribution Agreement.
34. Based on the above:-
(a) it is clear to me that the SoC, as currently framed, is liable to be struck out;
(b) it is far from clear to me that the alternative basis upon which Mr Brown seeks to frame his case is sustainable.
F. Quistclose Trust
35. In relation to the alleged Quistclose trust, with respect, the plea is not helpful at all (see §13(b) above).
36. As Mr Cheung rightly points out, such a trust can only arise if there is a clear objective intention on the part of the payor that the monies paid over are not at the free disposal of the recipient which the recipient acknowledges. “The question in every case is whether the parties intended the money to be at the free disposal of the recipient ”: Twinsectra v Yardley [2002] 2 AC 164 at §§74.
37. Here, there is simply no such thing. The payment was not paid as part of an arrangement between P and D2. There is no reason why D2 would hold anything on Quistclose trust for P. Mr Brown appears to accept such at the oral hearing – instead, he focused upon there being a Quistclose trust as between P and D1. I therefore say no more.
G. Dishonest Assistance
38. The final arrow in P’s quiver is dishonest assistance. D2’s objection is simple – the plea (see §13(e) above) is clearly deficient - there is no clear plea that:-
(a) D1 owed what fiduciary and/or trust duties to P;
(b) that D1 breached such duties;
(c) D2 induced or assisted D1 in such breaches;
(d) D2 did so with a dishonest state of mind.
39. In my view:-
(a) The only real plea against D1 for the existence of any trust (see §11(a) above) is problematic. Insofar as it is for a constructive/resulting trust, the reason for its unacceptability had been set out in §§2729 above, while the difficulties of P’s new case based on fraudulent misrepresentation had been set out in §§3033 above; for the alleged Quistclose trust, I also think the plea is too uncertain and unclear. There is no clear plea as to which terms in the CMCA would mean that the parties intended the money to not be at the free disposal of D1. Indeed, not even a copy of the CMCA had been provided.
(b) There is also clearly a lack of any plea of dishonesty. This seems also to be tacitly accepted by Mr Brown in his Skeleton, where he stated that “P will plead that being aware of the obvious discrepancies, D2 deliberately and dishonestly failed to turn its attention to the obvious fact that the funds were not paid under the Distribution Agreement. P will therefore plead on amendment blind eye knowledge as a result of the information that D2 had or should have had… ”.
40. The SoC is therefore also demurrable as pleaded. Further, it is not clear to me that a case of dishonesty can be made out even if P had not complied in full with its know-your-client or anti-money laundering duties – as Mr Cheung pointed out, failing to do so may be equally consistent with honesty or negligence: see Peconic Industrial Development Ltd v Yu Ka Hong Paul [2006] 4 HKC 406 at §33. Further, insofar as the proprietary base is said to be established by P’s new case based on fraudulent misrepresentation by D1, there is also the issue of the fact that, as at the time of the supposed assistance (ie, presumably the payment away of the Transfer Funds), rescission had not yet taken place (in fact, it is unclear whether it had up till now): Bristol and West Building Society v Mothew [1998] Ch 1 at 22.
H. Conclusion and Costs
41. To conclude, the SoC is clearly demurrable as currently pleaded on each of the causes of action relied upon, and ought to be struck out, and I so order.
42. The only issue is whether or not an opportunity should be given for P to put their house together; or whether the Action as against D2 should be dismissed.
43. Based on the analysis above, I have serious misgivings about the possibility of any sustainable claim being pitched against D2.
44. Mr Cheung stressed, in particular, on the Timing Point (see §8(b)(ii) above) – it is D2’s case, as supported by affidavit evidence, that the Transfer Funds had been spent on purchasing cryptocurrencies, which been paid out in accordance with D1’s directions, long before it was told by D1 that it wished to have its monies back; and given D2’s ancillary role, any liability, whatever cause of action is relied upon, must depend on notice of some sort – and P has no hope of establishing such prior to D1 having any inkling of what transpired between D1 and D2.
45. Mr Brown, on the other hand, argues that D2’s case, while supported by affidavit evidence, simply involves their mere say so – and his client is entitled to test the evidence in cross-examination. Further:-
(a) As mentioned above, in his Skeleton (§§41-52), Mr Brown highlighted to me a number of documents which seem to suggest that D2 had various know-your-client or anti-money laundering concerns in relation to the receipt of the payment and the Distribution Agreement (which is described as wholly uncommercial with a 50-year term of distribution rights for software); and that but for D2 turning a blind eye, it would have discovered that something was amiss even before it received the Transfer Funds. These issues pre-date the receipt of the Transfer Funds and I cannot rule out the possibility that some point can be made out of it (although in lieu of properly formulated pleadings I will not express a view as to whether they are adequate).
(b) It is not entirely clear whether or not the Transfer Funds had in fact been transferred away by D2 or whether it was still held by D2 (but notionally on behalf of another client). This may have an impact on the Timing Point.
46. Having considered all of the above, I am just about persuaded that P should be given one last opportunity to re-frame their case, although P should seriously consider the difficulties set out above and whether or not they could in fact be surmounted.
47. As the SoC is struck out, it would be illogical to give leave to apply to amend – instead, leave will be given for P to apply to put in a fresh SoC. P should be made to do so on a tight timeline and on an unless basis. Any leave application to put in the fresh SoC should be heard as though amendment principles apply.
48. I therefore make the following orders:-
(a) The SoC be struck out.
(b) P do have liberty to apply for leave to file a fresh SoC by way of Summons on or before 4:00 pm on 2 April 2024.
(c) Unless P make an application as per para.(b) above by 4:00pm on 2 April 2024, this Action shall be dismissed in its entirety, with costs of this Action (including all reserved costs) to D2, to be taxed if not agreed.
(d) Costs of the strike-out Summons be payable by P to D2, with certificate for counsel, to be summarily assessed. For such purposes:-
(i) D2 to lodge and serve its statement of costs within 3 days of this Order;
(ii) P do lodge and serve its opposition, if any, within 2 days thereafter.
49. I thank Counsel for their assistance.
(Alexander Tang)
Mr Toby Brown, instructed by Lewis Silkin, for the Plaintiff
Mr Keith Cheung, instructed by TITUS, for the 2nd Defendant