DINGWAY INVESTMENT LTD (Provisional Liquidators Appointed) v. CHINA CITY CONSTRUCTION & DEVELOPMENT CO. (HONG KONG) LTD AND OTHERS

HCA 309/2022

[2022] HKCFI 1312

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 309 OF 2022

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D E C I S I O N

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A.  INTRODUCTION

1.  By summons dated 14 April 2022, the Plaintiff (“P”) applied for disclosure of bank documents against the Bank for China (Hong Kong) Limited (“BoC”) and the Bank of Communication (“BoComm”) relating to:

(a)  the sum of US$45,076,164.38 transferred to account no. 012-737-20183676 held by the 6^th Defendant (“D6”) with BoC (“D6’s Account”);

(b)  the sum of US$13,340,000 transferred to account no. 382-573-101753301 held by the 7^th Defendant (“D7”) with BoComm (“D7’s Account”); and

(c)  the sum of US$1,300,000 transferred to account no. 382-573-9-317167-8 held by the 1^st Defendant (“D1”) with BoComm (“D1’s Account”).

2.  The three said sums (“the 3 Sums”) were parts of the sale proceeds in the total sum of US$103,000,000 of a piece of land in Miami, the USA (“the Land”). The 3 Sums are now subject to mareva injunctions granted by Cheng J on 31 March 2022 (and continued by A Chan J on 22 April 2022).

3.  BoC agrees to P’s application concerning D6’s Account (which has already been closed) subject to some minor comments on the terms of the proposed order. BoComm takes a neutral position to P’s application concerning D1 & D7’s Accounts. However, D1, D6 and D7 oppose P’s application. As a fall-back position, D7 took out a summons on 26 April 2022 applying for a stay of P’s summons pending the determination of its striking out summons dated 19 April 2022.

B.  THE BASIS OF P’S APPLICATION

4.  The factual basis of P’s application is as follows:

(a)  Before 15 October 2019, P held 100% shareholding of CCCC Holdings LLC (“the Shares”); CCCC Holdings LLC held 100% shareholding in CCCH (Delaware); CCCH (Delaware) held 100% shareholding in CCCC USA Holdings Corp (Delaware); and CCCC USA Holdings Corp (Delaware) held 100% shareholding in D5. In short, D5 was an indirect wholly owned subsidiary company of P.

(b)  D5 was the owner of the Land.

(c)  By two successive wrongful transfers in October and November 2019, the Shares were first transferred to D1 at nil consideration and without any proper justification, and then to D4 (which appears to be a nominee of D1) for a purported consideration of US$70 million.

(d)  In December 2021, D5 sold the Land to a US developer for US$103,000,000. The sale proceeds were transferred to various persons; among other things, the 3 Sums were transferred to D1, D6 & D7.

5.  As to the legal basis of the application:

(a)  First, P relies on the Norwich Pharmacal relief under the common law. In A Co v B Co [2002] 3 HKLRD 111 at §11, Ma J (as he then was) held that:

“The jurisdiction is a wide one. It is not restricted, as was at one time thought, to the disclosure of the names of wrongdoers only. In particular, where a plaintiff wishes to investigate the passage of monies in and out of bank accounts in aid of a tracing claim, discovery can be ordered of a bank’s books and documents…”

(b)  Second, P relies on s.21 of the Evidence Ordinance (Cap. 8) (“the EO”) to inspect and take copies of any entries in a banker’s record for the purposes of any proceedings. In CTO (HK) Ltd v Li Man Chiu [2002] 2 HKLRD 875 at §§12-13, Deputy Judge Poon (as he then was) held that:

“Though the court would not lightly use its power to order disclosure of full information touching the confidential relationship of banker and customer, such an order is justified even at the early interlocutory stages of an action where the plaintiff sought to trace funds which, in equity, belonged to it and of which there was strong evidence that it had been fraudulently deprived and delay might result in the dissipation of the funds before trial…”

“…First, the plaintiff must demonstrate a real prospect that the information may lead to the location or preservation of assets to which he is making a proprietary claim. For the jurisdiction rests upon the proposition that unless the assets in question can be located and secured, the ultimate determination of ownership of those assets may be frustrated by their removal or dissipation and there will be no point in calling on the third party at the trial to produce the required documents or give the requested information…”

6.  In the affidavit supporting P’s summons, it was stated, inter alia, that:

(a)  the application is to assist P’s claim to identify the current whereabouts of the 3 Sums and what have become of them;

(b)  P’s claim is of proprietary nature in respect of the interest in the Land;

(c)  to give effect to the mareva injunctions and facilitate P’s tracing and following claim to recover the sale proceeds of the Land and/or any traceable substitutes arising from the same, the information sought in the application is necessary.

7.  It is, therefore, clear that the purpose of P’s summons is to assist in tracing the sale proceeds of the Land. P alleges that it is entitled to:

(a)  trace the reduction in value of the Shares into the dissipated sale proceeds, and assert a proprietary claim over such proceeds; and/or,

(b)  claim the dissipated sale proceeds as its property on the basis that they were fruits of a fraudulent scheme perpetuated on P.

C.  THE GROUND OF OPPOISITOIN RAISED BY D1, D6 & D7

8.  D1, D6 and D7 oppose P’s summons on the main and simple ground that P’s tracing claim is unarguable because it did not have any proprietary interest in the Land, and hence, cannot have any tracing claim against the sales proceeds of the Land.

D.  ANALYSIS

9.  In A Co v B Co [2002] 3 HKLRD 111 at §12, Ma J (as he then was) emphasised the extraordinary nature of the Norwich Pharmacal relief: it is not a usual order and is not one that a court would lightly grant in the absence of powerful factors. Likewise, as mentioned, in CTO (HK) Ltd v Li Man Chiu, Deputy Judge Poon (as he then was) held that the power under s.21 of EO would not be lightly used. I take the view that P needs to show that, at least, it is reasonably arguable that P is entitled to trace the sale proceeds of the Land.

10.  P contends that the point raised by D1, D6 and D7 are those to be dealt with in D7’s summons to strike out P’s claim (which has been adjourned for argument); likewise, the mareva injunctions have been continued pending substantive arguments. Be that as it may, I need to consider the issue now for the purpose of P’s application. P also claims that Cheng J, who granted the mareva injunctions, accepted that P’s argument in this respect is arguable. The injunctions were granted on an ex parte basis. It is unclear whether Cheng J had in fact considered this particular issue, and if so, what her views were. In any event, I am obliged to consider this issue independently for the present purpose.

11.  Tracing is not a matter of discretion but a means of determining of property rights (Re Montagu’s Settlement Trust [1987] Ch 264 at 285B-C, per MegarryJ). Lord Millet held in Foskett v McKeown [2001] 1 AC 102 at 127F that “Property rights are determined by fixed rules and settled principles. They are not discretionary. They do not depend upon ideas of what is “fair, just and reasonable” .

12.  Tracing is neither a cause of action nor a remedy. Lord Millet explained the concept of tracing in Foskett v McKeown at p. 127B-C:

“The process of ascertaining what happened to the plaintiffs’ money involves both tracing and following. These are both exercises in locating assets which are or may be taken to represent an asset belonging to the plaintiffs and to which they assert ownership. The process of following and tracing are, however, distinct. Following is the process of following the same asset as it moves from hand to hand. Tracing is the process of identifying a new asset as the substitute for the old. Where one asset is exchanged for another, a claimant can elect whether to follow the original asset into the hands of the new owner or to trace its value into the new asset in the hands of the same owner. In practice his choice is often dictated by the circumstances.” (emphasis added)

13.  The sale proceeds in question were derived from the sale of the Land. However, the Land never belonged to P; it was owned by D5. The fact that D5 was an indirect wholly owned subsidiary company of D1 did not give D1 any legal or equitable interest in the Land. In Luo Xing Juan Angela v The Estate of Hui Shui See, Willy Deceased and others (2009) 12 HKCFAR 1, §34, the Court of Final Appeal cited Macaura v Northern Assurance Co Ltd [1925] AC 619, and reaffirmed the fundamental principles that “a shareholder has no legal or equitable interest in the company’s property (as opposed to a right to share in the profits of its business and to a distribution of any surplus on liquidation)”. In Prest v Petrodel Ltd and Others [2013] UKSC 34, Lord Sumption summarised the position as follows at §8:

“Subject to very limited exceptions, most of which are statutory, a company is a legal entity distinct from its shareholders. It has rights and liabilities of its own which are distinct from those of its shareholders. Its property is its own, and not that of its shareholders. In Salomon v A Salomon & Co Ltd [1897] AC 22, [1895–9] All ER Rep 33, the House of Lords held that these principles applied as much to a company that was wholly owned and controlled by one man as to any other company. In Macaura v Northern Assurance Co Ltd [1925] AC 619, [1925] All ER Rep 51, the House of Lords held that the sole owner and controller of a company did not even have an insurable interest in property of the company, although economically he was liable to suffer by its destruction. Lord Buckmaster said ([1925] AC 619 at 626–627, [1925] All ER Rep 51 at 54):

‘no shareholder has any right to any item of property owned by the company, for he has no legal or equitable interest therein. He is entitled to a share in the profits while the company continues to carry on business and a share in the distribution of the surplus assets when the company is wound up.’

In Lonrho Ltd v Shell Petroleum Co Ltd [1980] 1 WLR 627 the House of Lords held that documents of a subsidiary were not in the ‘power’ of its parent company for the purposes of disclosure in litigation, simply by virtue of the latter’s ownership and control of the group. These principles are the starting point for the elaborate restrictions imposed by English law on a wide range of transactions which have the direct or indirect effect of distributing capital to shareholders. The separate personality and property of a company is sometimes described as a fiction, and in a sense it is. But the fiction is the whole foundation of English company and insolvency law. As Robert Goff LJ once observed, in this domain ‘we are concerned not with economics but with law. The distinction between the two is, in law, fundamental’: Bank of Tokyo Ltd v Karoon [1986] 3 All ER 468 at 486, [1987] AC 45n at 64. He could justly have added that it is not just legally but economically fundamental, since limited companies have been the principal unit of commercial life for more than a century. Their separate personality and property are the basis on which third parties are entitled to deal with them and commonly do deal with them.”

More recently, in Hurstwood Properties (A) Ltd and others v Rossendale Borough Council and another [2021] UKSC 16, at §64, the UKSC held that:

“…The separate personality of a company refers - as Lord Sumption had already noted at para 8 - to the doctrine that a company is treated in law as a person in its own right, capable of owning property and having rights and liabilities of its own which are distinct from those of its shareholders. In Salomon v A Salomon & Co Ltd [1897] AC 22 the House of Lords confirmed that this doctrine applies as much to a company that is wholly owned and controlled by one individual as to any other company; so too does the rule of limited liability, which limits the liability of a shareholder for debts of the company to the amount invested by the shareholder in the company.”

14.  It follows from the above fundamental principles of company law that D5, not P, was the legal and beneficial owner of the Land; and after its sale, the sale proceeds of the Land. In these circumstances, on what basis can P trace the sale proceeds when apparently, it did and does not have any proprietary interest in them?

15.  P contends that, firstly, it is entitled to trace the reduction in value of the Shares into the sale proceeds of the Land because tracing is about the “value inherent in a trust asset (but not the physical asset itself)”, and there is a sufficient transactional links between (a) the reduction in value of the Shares and (b) the disposal of the sale proceeds of the Land. It relies on Lord Millet’s following judgment in Foskett v McKeown at p. 128A-B:

“We speak of money at the bank, and of money passing into and out of a bank account. But of course the account holder has no money at the bank. Money paid into a bank account belongs legally and beneficially to the bank and not to the account holder. The bank gives value for it, and it is accordingly not usually possible to make the money itself the subject of an adverse claim. Instead a claimant normally sues the account holder rather than the bank and lays claim to the proceeds of the money in his hands. These consist of the debt or part of the debt due to him from the bank. We speak of tracing money into and out of the account, but there is no money in the account. There is merely a single debt of an amount equal to the final balance standing to the credit of the account holder. No money passes from paying bank to receiving bank or through the clearing system (where the money flows may be in the opposite direction). There is simply a series of debits and credits which are causally and transactionally linked. We also speak of tracing one asset into another, but this too is inaccurate. The original asset still exists in the hands of the new owner, or it may have become untraceable. The claimant claims the new asset because it was acquired in whole or in part with the original asset. What he traces, therefore, is not the physical asset itself but the value inherent in it.” (emphasis added)

16.  It is vital not to take the sentences highlighted above (which are apparently those P relies on in particular) in the said judgment of Lord Millet out of context. Lord Millet was explaining mainly what tracing of money in a bank account really means. Insofar as money in a bank account is concerned, it is merely a debt or chose in action owed by the bank to the account holder; and, hence, when money is transferred from one account to another, there is in fact no movement of any money, rather a chosen in action is extinguished and replaced or exchanged by a new one, these choses in action are in this sense causally and transactionally linked. As far as property other than money is concerned, tracing is not concerned with tracking the original property; rather, it concerns a claim over the new asset which has been acquired wholly or partly by the original asset. Hence, Lord Millet concluded by saying that what the claimant traces is not “the physical asset” but “the value inherent in it”. The value inherent in the physical asset, i.e. the original asset, would be reflected or represented by the new or substituted asset (though their values may be different). When Lord Millet referred to “causally and transactionally linked”, he was saying that, in terms of causation, there must be a sufficient transactional link or nexus between the old asset and the new or substitute asset.

17.  Moreover, it is important to read the next paragraph of Lord Millet’s judgment at p. 128D-G:

“Tracing is thus neither a claim nor a remedy. It is merely the process by which a claimant demonstrates what has happened to his property, identifies its proceeds and the persons who have handled or received them, and justifies his claim that the proceeds can properly be regarded as representing his property. Tracing is also distinct from claiming. It identifies the traceable proceeds of the claimant's property. It enables the claimant to substitute the traceable proceeds for the original asset as the subject matter of his claim. But it does not affect or establish his claim. That will depend on a number of factors including the nature of his interest in the original asset. He will normally be able to maintain the same claim to the substituted asset as he could have maintained to the original asset. If he held only a security interest in the original asset, he cannot claim more than a security interest in its proceeds. But his claim may also be exposed to potential defences as a result of intervening transactions. Even if the plaintiffs could demonstrate what the bank had done with their money, for example, and could thus identify its traceable proceeds in the hands of the bank, any claim by them to assert ownership of those proceeds would be defeated by the bona fide purchaser defence. The successful completion of a tracing exercise may be preliminary to a personal claim (as in El Ajou v. Dollar Land Holdings [1993] 3 All E.R. 717) or a proprietary one, to the enforcement of a legal right (as in Trustees of the Property of F.C. Jones & Sons v. Jones [1997] Ch. 159) or an equitable one.” (emphasis added)

18.  It is clear that tracing is premised on the existence of some proprietary interest in the original property in question on the part of the claimant. He may only claim the same interest in the substituted property. It follows that if he did not have any proprietary interest in the original property, he cannot possibly claim any proprietary interest in the substituted property. Returning to the facts of this case, as P had no proprietary interest whatsoever in the Land, it cannot claim any proprietary interest in the sale proceeds of the Land (or what have become of those proceeds). For these reasons, properly understood, Lord Millet’s said judgment in Foskett v McKeown does not support P’s case.

19.  P also argues that, if money has come into the wrong hands as where it represents the fruits of a fraud, equity imposes a constructive trust on the fraudulent recipient and the money is recoverable and traceable in equity, citing Angove’s Pty Ltd v Bailey [2016] 1 WLR 3179, §30. In Angove’s Pty Ltd v Bailey [2016] 1 WLR 3179, §30, Lord Sumption referred to circumstances in which a restitutionary proprietary claim may exist; he held that “where money is paid with the intention of transferring the entire beneficial interest to the payee, at least that must be shown in order to establish a constructive trust is… (ii) that irrespective of the intention of the payer, in the eyes of the 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.” (emphasis added) In those circumstances, the payer of the money, who was the legal and beneficial owner thereof before making the payment, is entitled to have a restitutionary proprietary claim based on constructive trust (Lewin on Trust (12^th ed.), §§8-024). But the vital point is that the payer used to be the legal and beneficial owner of the money in question. Lord Sumption’s said judgment cannot assist P because P was never the legal or beneficial owner of the Land; and hence, the sale proceeds of the Land.

20.  In effect, P is seeking to lift or pierce the corporate veils. However, there is no suggestion that there are exceptional circumstances which can justify doing so in this case.

E.  CONCLUSION

21.  For the above reasons, I am not satisfied that it is reasonably arguable that P can trace the sale proceeds of the Land. On this ground, P’s application is dismissed with costs to D1, D6 & D7 to be summarily assessed. D1, D6 & D7 shall submit their statements of costs within 14 days hereof; and P shall submit a list of objections to each of those statements within 14 days thereafter. I shall then assess the costs on paper. It is unnecessary for me to make any order in respect of D7’s summons.