CHIEF FINE INVESTMENTS LTD (IN LIQUIDATION) AND ANOTHER v. KINGSTON CAPITAL INVESTMENT LTD AND OTHERS

HCA 996/2022

[2024] HKCFI 3729

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 996 OF 2022

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D E C I S I O N

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Background

1.  The 1^st plaintiff (“P1”) is a company which had been wound up in 2002. The 2^nd plaintiff (“Tang”) and Mr Wong Kwok Man (“Wong”) were the joint and several liquidators of P1.

2.  Tang and Wong were also the trustees in bankruptcy of So Ching Wan (“So”) and He Xiao Ling (“He”). So and He were said to be in control of P1, the 3^rd defendant (“D3”) and the 4^th defendant (“D4”) before they were bankrupted in about 2002. Wong is not part of the proceedings.

3.  In 1992 and 1993, So caused D3 and D4 respectively to acquire properties defined in the Amended Statement of Claim (the “ASOC”) as the Assen Lots (for HK$13 million) and Sky Fair Lots (for HK$2 million). It is P’s case that it provided funding for the purchase of the Assen Lots and the Sky Fair Lots and as such is a beneficial owner of the Assen Lots and the Sky Fair Lots.

4.  On 25 July 1996, the 1^st defendant (“D1”) (as lender), P1 (as borrower) and D3 and D4 (as mortgagors) executed a loan agreement for HK$10 million. The cumulative loan amount was subsequently increased to HK$16 million via 3 supplemental agreements (together, the “Loan Agreements”).

5.  By a legal charge dated 25 July 1996 (the “Legal Charge”), the Assen Lots and Sky Fair Lots were respectively charged by D3 and D4 to D1 as security for the loans extended by D1 to P1 under the Loan Agreements.

6.  P1 defaulted under the Loan Agreements. On 18 October 2000 D1 commenced a mortgagee action under Order 88, Rules of the High Court against P1, D3 and D4 under HCMP 5367/2000.

7.  On 28 February 2001, the court granted money judgment and a possession order in respect of the Assen Lots and the Sky Fair Lots in favour of D1. By this time some of the Assen Lots had been resumed by the government for some HK$6 million-odd, which had been paid to D1.

8.  D1 obtained possession of the remaining properties (the “Remaining Assen Lots” and the Sky Fair Lots) in November 2005 and sold them by way of public auction on 10 August 2016 through Landscope Realty Limited (“Landscope”) to the 2^nd defendant (“D2”) (as the highest bidder) (the “Auction Sale”). The sale prices of HK$9.2 million and HK$2.29 million were consistent with the market values assessed by Grandmax Surveyors Limited (“Grandmax”). P1 and P2 have not put forward any evidence to challenge Grandmax’s valuation.

9.  P1 and P2’s claims concern the sale of the Remaining Assen Lots and the Sky Fair Lots by D1 to D2 through the Auction Sale. P1 and P2 seek to set aside the Auction Sale on the bases that:

(1)  P1 provided the funding of HK$16,402,825.04 to purchase the Assen Lots and the Sky Fair Lots and was at all material times the beneficial owner of the Assen Lots and the Sky Fair Lots;

(2)  The Auction Sale was a sham or a sale at undervalue bought about by a dishonest design implemented by D1, D2 and/or D5 to deprive the rights of P1’s creditors to the Remaining Assen Lots and the Sky Fair Lots.

10.  D1 and D5 respectively took out applications to strike out the claims against D1 and D5 in July 2023. The strike-out applications were allowed by a Master on 2 February 2024 (the “Decision”).

11.  This is Ps’ appeals against the Decision.

Applicable Principles – Striking Out

12.  The relevant principles are trite. Order 18 rule 19 of the Rules of the High Court provides as follows:

“(1) the Court may, either of its own motion or on application, at any stage of the proceedings order to be struck out or amended any pleading or the indorsement of any writ in the action, or anything in any pleading or in the indorsement, on the ground that—

(a) it discloses no reasonable cause of action or defence, as the case may be; or

(b) it is scandalous, frivolous or vexatious; or

…

(d) it is otherwise an abuse of the process of the court;

and may order the action to be stayed or dismissed or judgment to be entered accordingly, as the case may be.

(2) No evidence shall be admissible on an application under paragraph (1)(a).”

13.  Order 18 rule 19(2) excludes evidence (whether by the applicant or the respondent) on an application under Order 18 rule 19(1)(a) that the ASOC discloses no reasonable cause of action. For that ground therefore, the court is not entitled to look at any evidence to assess the extent to which the claim discloses a reasonable cause of action, and the court must assume that all facts set out in the ASOC will be made out.

14.  It is only in plain and obvious cases that the court should exercise its summary powers to strike out the indorsement on any writ or any pleading under Order 18 rule 19. There should be no trial upon affidavit. Disputed facts were to be taken in favour of the party sought to be struck out. Nor should the court decide difficult points of law in striking out proceedings. The claim must be obviously unsustainable, the pleadings unarguably bad and it must be impossible, not just improbable, for the claim to succeed before the court will strike it out. If the Court does not think the matter to be clear beyond doubt or if it fails to be satisfied that there is no reasonable cause of action or that the proceedings are frivolous or vexatious, then, there should be no striking out. One must be careful not to drive a plaintiff from the judgment seat nor should the court decide difficult points of law[1].

15.  The applicant bears the burden to show a plain and obvious case in order to strike out the plaintiff’s claim[2].

16.  It is important to set out clearly that Mr Vincent Lung together with Ms Ivy Ho (counsel for D1) and Ms Astina Au (counsel for D5) divided the bases of the strike out application under two grounds: 1) no reasonable cause of action and 2) scandalous, frivolous or vexatious and abuse of process.

17.  Under the no reasonable cause of action ground, no evidence was relied upon and Ms Au made oral submissions with reference only the ASOC. Such submissions were adopted by Mr Lung for and on behalf of D1.

18.  On the other hand, Mr Lung made his submissions on the scandalous, frivolous and abuse of process grounds with reference to the evidence filed by the respective party. His submissions were adopted by Ms Au for and on behalf of D5.

No Reasonable Cause of Action

19.  Mr Barrie Barlow SC leading Mr George Chu appeared for P1 and P2. It was contended by Mr Barlow in paragraph 11 of his skeleton submissions that:

“As can be seen from the ASOC (and from the Master’s summary), the Plaintiff’s case is that, in anticipation of the bankruptcy of So and He plus the winding up of P1, D5, through his control of D1-D4, dishonestly manipulated the subject dealings in the [Assen Lots and the Sky Fair Lots] (which were held by D3 and D4 on a resulting or constructive trust for P1) within a dishonest design or scheme (the “Dishonest Scheme”) in order unlawfully to block P1 from enforcing its equitable entitlements (and thereby to defraud P1’s creditors) and consequently the sale of the [Remaining Assen Lots and the Sky Fair Lots] should be set aside, the Resumption Monies plus all profits from the Sale (and from the use of the [Assen Lots and the Sky Fair Lots] by the Defendants) or equitable compensation in lieu by paid over to the Plaintiffs (i.e. to P1’s insolvent Court-administered estate) in order to permit pari passu distribution to P1’s creditors.”

20.  The alleged Dishonest Scheme therefore contains the following elements:

(1)  In anticipation of the bankruptcy of So and He, plus the winding up of P1;

(2)  D5, through his control of D1 – D4;

(3)  dishonestly manipulated dealings in Properties held by D3 and D4 on a resulting or constructive trust for P1;

(4)  to unlawfully block P1 from enforcing its equitable entitlements;

(5)  and to defraud P1’s creditors.

21.  At this juncture, it is necessary to set out the paragraphs in the ASOC that Mr Barlow relies on in contending that there is no substance in Ms Au’s complaints and P1 and P2’s case has been properly pleaded. In Mr Barlow’s oral submissions, he referred to and relied on the following paragraphs of the ASOC (and in that particular order) to submit that they give rise to a properly pleaded case against D1 and D5:

(1)  Paragraph 7:

“[P1] (now in liquidation), [D3] (now in liquidation) and [D4] used to be run and controlled by [So] and [He] prior to 2002. So and He were also adjudged bankrupt in or about 2002 for failing to make good respective personal guarantees pertaining to the business of [P1]. Tang has been trustee of the property of both So and He.”

(2)  Paragraph 14:

“[P1] (prior to its liquidation in 2002), [D3] and [D4] used to be owned and/or controlled by So and/or He. In the premises, by the payments pleaded hereinabove, the [Assen Lots and the Sky Fair Lots] were held by [D3] and [D4] on trust (mere trustee) for and on behalf of [P1]. Alternatively, [D3] and [D4] were constructive trustees of the [Assen Lots and the Sky Fair Lots] for [P1].”

(3)  Paragraph 9:

“In or about 1992, So caused [D3] to acquire the [Assen Lots] for approximately HK$13 million…”

(4)  Paragraph 13:

“… At all material times, [P1], provided funding for about HK$16 million to purchase the [Assen Lots and the Sky Fair Lots].”

(5)  Paragraph 10:

“[D3] provided a legal charge over the Assen Lots to [D1] on or about 25^th July 1996, as elaborated below.”

(6)  Paragraph 12:

“[D4] provided a legal charge over the Sky Fair Lots to [D1] on or about 25^th July 1996, as elaborated below.”

(7)  Paragraph 15:

“On 25^th July 1996, a loan agreement for HK$10 million was signed between [P1] as the borrower, [D1] as the lender, [D3] and [D4] as the mortgagors, and So and He as co-guarantors. By various supplemental agreements, the total loan amount was increased to HK$16 million … It is apparent that [D3] and [D4] would not benefit from such Loan Agreements.”

(8)  Paragraph 3:

“[D1] is a company incorporated in the British Virgin Islands pursuant to the companies laws therein. It has operations in Hong Kong and is at all material times under the control of [D5]. [D1] has been actively engaged in lending and other commercial activities in Hong Kong since at least 1996. However, [D1] has not registered in Hong Kong as a foreign company and is in breach of section 776 of the Companies Ordinance (cap. 622, laws of Hong Kong) since at least 1996 and under counterparts of the then Companies Ordinance (former Cap. 32, laws of Hong Kong).”

(9)  Paragraph 8:

“[D5] resides in Hong Kong at all material times. He confirmed in his 3^rd Affirmation filed under HCB 4475/2002 (bankruptcy case of So) dated 9 January 2019 that he was one of the representatives of [D1] sent in 2002 to take control of [D3]. [D5] also has other business operations in Hong Kong and the PRC.”

(10)  Paragraph 17:

“As a result of the defaults of [P1] in repaying the said loans, with So and He also failing to make good their respective personal guarantees, [D1] obtained judgment for the Loan Agreements and took possession…”

(11)  Paragraph 18:

“[D5] and his family members were sent by [D1] as its ‘representatives’ to take control of [D3] pursuant to the legal charges in or about 2002.”

(12)  Paragraph 19:

“By the dishonest design of [D1] and [D5], [D3] and [D4] remained to be the legal title owners of the [Remaining Assen Lots and Sky Fair Lots] until 10^th August 2016.”

(13)  Paragraph 20:

“On or about 10^th August 2016, [D1] purportedly sold through an ‘auction’ and/or caused the unlawful transfer of the legal title to all of those [Remaining Assen Lots and Sky Fair Lots] to [D2]. The transfers of the Remaining Assen Lots by [D1] to [D2] were by way of Memorandum of Agreement for Sale and Purchase dated 10^th August 2016 (Memorial No. 16090500230019) and Assignment dated 25^th August 2016 (Memorial No. 16091500210032).”

(14)  Paragraph 22:

“In the premises, the [Remaining Assen Lots and Sky Fair Lots] were purportedly and unlawfully sold or caused to be transferred by [D1] to [D2] for a purported total consideration of HK$11.5 million by way of sale (“Sale”) (HK$9.2 million for the Remaining Assen Lots and HK$2.29 million for the Sky Fair Lots). For the Remaining Assen Lots, [D3] and [D5] had caused a valuation of these in 2015, reporting a then value at HK$16 million.”

(15)  Paragraph 24: -

“[P1 and P2] aver that the Sale was a sham. Alternatively, it was a sale at undervalue and ought to be set aside under section 60 Conveyancing and Property Ordinance (Cap. 219, laws of Hong Kong). [P1 and P2] will plead further after valuation reports are available regarding the prevailing market value of the said Remaining Properties.”

(16)  Paragraph 25:

“Further or alternatively, [D2] knowingly assisted the dishonest design of [D1] and/or [D5] in arranging the transfer of ownership of the [Remaining Assen Lots and Sky Fair Lots] from [D3] and [D4] to [D2].”

(17)  Paragraph 26:

“As part of the dishonest design of [D5] and to complicate matters further, on or about 1^st August 2016 (i.e. 9 days before the ‘auction’), [D5] served a statutory demand on [D3] claiming unpaid directors’ loans of some HK$95,000, which had purportedly been overdue for the previous 10 years or so. As a result, [D3] was wound up by the Court on or about 2^nd November 2016. Such winding up of [D3] on [D5]’s petition has thwarted the investigations of [P2] into the affairs of [D3].”

(18)  Paragraph 36:

“It is apparent that by disposing of the Resumption Monies in about 2005 and the [Remaining Assen Lots and Sky Fair Lots] in 2016, the entire dishonest scheme was arranged, executed and masterminded by [D5] (who by then was already in control of [D3]), with the assistance of [D1] and [D2], in depriving the creditors of [D1] of pari passu distribution of the Properties and income generated therefrom.”

(19)  Paragraph 37:

“It is apparent that [D1], [D2] and/or [D5] did not make full and frank disclosure to [P1 and P2] at any time concerning their dishonest design in depriving the creditors of the [P1] their rights concerning disposal of the [Remaining Assen Lots and Sky Fair Lots] and Resumption Monies.”

Particulars of Dishonesty

(i) Upon giving up the said Properties as security, failure to inform [P1 and P2] as well as the provisional liquidators of [P1] at all material time;

(ii) Failure to give up control of the said Properties after surrendering the same as security;

(iii) Failure to inform [P1 and P2] of the reduction in value of the security from the [Remaining Assen Lots and Sky Fair Lots] after claiming for the full amount due under the Loan Agreements in [D1]’s [Proof of Debt] and voting for the full amount at the first meeting of creditors of [P1];

(iv) Conducting the Sale at an undervalue with a dishonest intention to defraud creditors of [P1] and/or [D3] and/or [D4];

(v) Retention of the Resumption Monies and proceeds from the Sale for the benefit of [D1] and/or [D5] without informing [P1 and P2]; and

(vi) Conduct of the above acts and/or omissions, designed to remove the Resumption Monies and [the Remaining Assen Lots and Sky Fair Lots] which otherwise would be available for pari passu distribution to [P1]’s creditors.

(20) Paragraph 46:

“In the premises, the said Sale constituted transactions at an undervalue which ought to be set aside by the Court pursuant to section 60, Conveyancing and Property Ordinance (Cap. 219, Laws of Hong Kong). Alternatively, each of [D1], [D2], [D3] and [D5] is liable to account to [P1] or to compensate [P1] for their knowing receipt of the each of the [Remaining Assen Lots and Sky Fair Lots] and/or the Resumption Monies.”

(21)  Paragraph 47:

“In the premises, [D1] and/or [D5] have been in breach of duties owed to [P1] and are liable to compensate [P1] for their dishonest acts of misappropriation by purporting to collect the Resumption Monies or sell or selling each of the [Remaining Assen Lots and Sky Fair Lots] at a known undervalue in order to defraud [P1] (including its creditors).”

22.  Despite the advocacy of Mr Barlow, I cannot agree that the concise summary as set out in paragraph 11 of his skeleton can be derived from the above paragraphs in the ASOC relied upon (or the ASOC as a whole).

23.  It was submitted by Mr Barlow that it would be sufficient if the material facts concerning the Dishonest Scheme had been pleaded in the ASOC. I agree with the proposition[3]. However, I disagree that the material facts had been pleaded:

(1)  What the ASOC has set out are simply different bits of facts scattered in the ASOC with no organization or connection such that a reader will not be able to discern what was the design that is alleged to have been carried out by the defendants.

(2)  In particular, nowhere in the ASOC is it mentioned that D5 conjured up the conspiracy in anticipation of the bankruptcy of So and He and the winding up of P1.

(3)  There is also no mention of D5’s control of D2 or D4.

(4)  No basis or particular was pleaded for D2’s knowledge in the alleged “dishonest design” as the purchaser of the Remaining Assen Lots or the Sky Fair Lots. I see no basis for asserting that D2 was a constructive trustee.

(5)  I therefore reject Mr Barlow’s submission that the ASOC, “when fairly read” would support the summary of the Dishonest Scheme as set out in paragraph 11 of his submissions. There is simply no such cause of action properly pleaded in the ASOC.

(6)  As for conspiracy to injure (the cause of action against D5 alone as pleaded in paragraph 16 of the ASOC), the following elements need to be proven[4] (as therefore need to be pleaded):

(a)  An overt act which is the act of all the alleged conspirators;

(b)  The overt act showing that the conspiratorial agreement alleged against the defendants had been entered into by each and every one of them;

(c)  The agreement, and not merely the intention of one person alone, was implemented;

(d)  Such implementation caused the damage complained of; and

(e)  the means of carrying out the agreement, i.e. whether lawful or unlawful.

(7)  As pointed out by Ms Au, no timing of the conspiratorial agreement was pleaded. Mr Barlow in his reply submitted that it must have been some time in 2001 (prior to P1’s liquidation). However, there is no plea in the ASOC to support this submission.

(8)  The “conspiratorial agreement” requirement was also not pleaded. It is insufficient to include a mere statement in the ASOC to the effect that D1, D2 and D5 “have conspired together to cause loss” without any particular as to what were the terms of the agreement.

(9)  Despite a plea of dishonest design and particulars of dishonesty in paragraph 37 of the ASOC, there is no logical connection between the particulars pleaded so as to give rise to a scheme. It is not known what were relied upon as part of the conspiratorial agreement: was it the purchase of the Assen Lots and the Sky Fair Lots, or a failure to make full and frank disclosure of their dishonest design?

(10)  As for the claim of knowing receipt based on a breach of trust, paragraph 47 of the ASOC points to a breach on the parts of D1 and D5 but it is not pleaded what duty was breached and how did the duty arise. Without pleading a proper basis for a “breach of duty”, there is no basis for claiming an account for secret profits.

24.  P1 and P2 also relied on the fact that D1 has not complied with section 776 of the Companies Ordinance (Cap. 622). However, the consequence of breach is only a fine and does not support the relief sought of “a declaration that D1 has no locus standi to operate in Hong Kong”.

25.  There was also a plea that as D1 voted its claim of HK$24,981,625.91 in full without deducting the value of the security at the 1^st meeting of creditors of P1 it had knowingly and voluntarily surrendered or is deemed to have surrendered all of the Assen Lots and the Sky Fair Lots as security according to Rule 126 of the Companies (Winding-Up) Rules (Cap. 32H). However, while D1 is a creditor of the P1, in holding security provided by third parties (D3 and D4), D1 is not regarded as a secured creditor of P1[5]. I agree with Mr Lung that D1 has never been a “secured creditor” of P1 for the purpose of its insolvency, and Rule 126 of the Companies (Winding-up) Rules is not engaged. Similarly, D1 has never been a “secured creditor” of So or He for the purpose of their bankruptcy such that Rule 99I of the Bankruptcy Rules (Cap. 6A) is not engaged.

26.  I thus come to the conclusion that no reasonable cause of action has been pleaded against D1 or D5 in the ASOC and the claim against D1 and D5 ought to be struck out on that basis.

Frivolous, Vexatious or Abuse of Process

27.  As I have already concluded that the claim against D1 and D5 in the ASOC ought to be struck out pursuant to Order 18 rule 19(1)(a), it is strictly not necessary to consider the other grounds relied upon by Mr Lung and Ms Au.

28.  However, for completeness, I will deal with the issue of whether P’s claim against D1 and D5 ought to be struck out under Order 18 rule 19(1)(b) & (d) as well.

29.  The bases of such grounds are:

(1)  Contractual Estoppel.

(2)  Henderson abuse: Contradictory evidence was filed by Tang in another related bankruptcy action. It was contended that as Tang had been engaged in previous litigation with one or more of the defendants, where he had made statements which are contrary to his present case of P1 being the beneficial owner of the Assen Lots and the Sky Fair Lots, P1 and P2 should not be allowed to contend that P1 is the beneficial owner in the present litigation.

(3)  Collateral Attack: The undervalue allegation is against the ruling in respect of previous court judgments.

Contractual Estoppel

30.  There is no dispute that the Clause 12(a)(i) of each of the Loan Agreements and Clause 2 of the Legal Charge all provide that D3 was the beneficial owner of the Assen Lots and D4 to be the beneficial owner of the Sky Fair Lots.

31.  It was contended by Mr Lung (and adopted by Ms Au) that P1, as a contractual party to these legal documents is contractually bound by the representations therein and is estopped from denying the facts set out in the Loan Agreements and the Legal Charge.

32.  Whilst I agree that in the circumstances of the facts of the present case, contractual estoppel would be a compelling defence to be raised by D1 and D5 against Ps’ claims, based on the Court of Appeal decision in Polyline Development Ltd (In Liq.) v. Ching Lin Chuen & ors[6], in the context of a striking out application, “it is not necessary in a pleading of a resulting trust claim for the claimant to pre-empt a possible estoppel point that the defendant might raise in defence.”[7]

33.  Although in Polyline, the Court of Appeal’s decision was also affected by the fact that the contract in question was entered into by a director in breach of fiduciary duty and the other party was a company controlled by that very director, I do not read the Court of Appeal’s decision to mean that without such rogue director, a strike out application would succeed simply due to the existence of a strong estoppel defence.

34.  As such, I do not agree that in pleading a case which seemingly might be defeated by a contractual estoppel defence would amount to an abuse of process.

Henderson Abuse - Contradictory Evidence

35.  In HCB 4475/2002 (the bankruptcy proceedings of So), Tang filed his 3^rd and 5^th Affirmations (respectively the “3^rd Bankruptcy Affirmation” and the “5^th Bankruptcy Affirmation”) as one of the joint and several trustees in bankruptcy of the property of So, the bankrupt. Tang never contended P1 was the beneficial owner of the Properties in HCB 4475/2002. Rather, Tang expressly stated in (i) his 3^rd Bankruptcy Affirmation at §31 that: “[a]part from the Properties of Assen, three other lots of land in near-by areas owned by Sky Fair Development Limited … were apparently also pledged to Kingston.”; and (ii) in his 5^th Bankruptcy Affirmation at §15 that “[i]t is common knowledge and an undeniable fact that the Assen Lots were purchased in 1992 with a loan from Chief Fine [P1].”

36.  In Chu Yue Bun v Lai Shiu Woon[8], Kwan VP endorsed the following principles as relevant:

(1)  A pleading can be struck out if it is plain and obvious that the case pleaded has no factual basis, or has no solid basis capable of proof and is a myth with no substantial foundation, or presents a tissue of improbabilities which ought not to be sent to proof. The court is not bound to accept an allegation as true and proceed on a fictional basis if it is something which can clearly be shown to be incontrovertibly false. (Lam Kit Sing v Chungshan Commercial Association, Hong Kong & Ors, HCA 2011/2014, 29 June 2016, §18).

(2)  It may be an abuse of process for a party, with full knowledge of the facts, to advance a claim that is diametrically opposed to its position taken in an earlier set of proceedings. The abuse lies in its effect on the integrity of the administration of justice, which would be no less compromised even if the previous inconsistent allegation was not followed through to judgment, particularly when such previous allegation was of some significance. (Chan Chun Chuen v Kao, Lee & Yip at §§30, 78)

(3)  What constitutes an abuse of process in the type of case referred to in (2) may vary with the circumstances of each case. An important factor in determining whether it is an abuse of process is to see whether there is any explanation why diametrically inconsistent cases have been advanced by a party in different proceedings. (Chan Chun Chuen v Kao, Lee & Yip at §§30(3), 68; Jim Chiu Yuen v C L Chow & Macksion Chan (a firm) & Ors [2018] HKCFI 154 at §33)

37.  It was also held by Kwan VP that: “the court does not adopt a blinkered approach to the evidence and it is not bound to accept an allegation as true in light of obvious inconsistencies on a matter of significance for which no explanation for the inconsistencies was given.[9]”

38.  The explanation proffered by Tang in answer to this attack is set out in paragraphs 32 – 35 of his affirmation filed on 25 September 2023:

“32. The purpose of the summons taken out by me in the capacity as a bankruptcy trustee in HCB 4475/2022 (“S29 Summons”) were solely for discovery of documents and information in respect of the [Assen Lots and the Sky Fair Lots] that are prima facie owned by and also the affairs of Assen (as managed by D5 since 2002), of which Mr So was a shareholder. In the said summons, the Trustee never made any claim, and indeed cannot make any claim concerning ownership of these [Assen Lots and the Sky Fair Lots] by Mr So (or by [P1]). References to funding from [P1] were made by way of background (to show the relationship between Assen and the [Assen Lots and the Sky Fair Lots] with Mr So.)  There was never any claim of ownership by Mr So or [P1] in those proceedings either.

33. … Ownership of the [Assen Lots and the Sky Fair Lots], whether legal or beneficial, was never part of the S29 Summons, or arguments of the Trustee therein….

34. … I had not made any assumptions, arguments or submissions regarding the legal/beneficial ownership of the [Assen Lots and the Sky Fair Lots] at all.

35. … Mr So’s bankruptcy and [P1]’s liquidation are separate insolvency matters. I am advised and verily believe that there are no contradictions at all with Assen being the registered owner while [P1] was the beneficial owner.”

39.  As such, Tang has provided an explanation:

(1)  when he swore the 3^rd Bankruptcy Affirmation or the 5^th Bankruptcy Affirmation, he did not do so in his own capacity or as P1’s liquidator. He did so in the capacity as the trustee of So’s bankruptcy estate.

(2)  In any event, P1, which was not part of the bankruptcy proceedings, should not be bound by such content.

(3)  Further, the ownership of the Assen Lots and the Sky Fair Lots were not in issue in HCB 4475/2002. P1 and Tang (in his capacity as liquidator of P1) was also not a party in HCB 4475/2002 and could not have litigated the issue of the ownership of the Assen Lots and the Sky Fair Lots therein.

40.  Mr Lung submitted that there was “no good explanation” given. However, I do not agree that the explanation is one that is so unreasonable or hopeless that the court can summarily dismiss the explanation or decide that it will not hold up at this juncture. This would only be possible after cross-examination of Tang.

41.  In light of Tang’s explanation, I am of the view that it has not been demonstrated at this stage that P1’s contention as the beneficial owner of the Assen Lots and the Sky Fair Lots have “clearly been shown to be incontrovertibly false”, or “has no solid basis capable of proof and is a myth with no substantial foundation.”

42.  In such circumstances, I am not satisfied that the threshold for frivolous, vexatious or abuse of process is reached by reason of Tang’s evidence in HCB 4475/2002.

43.  It was also contended that from the evidence that P1 and P2 had provided, in particular a schedule of Assen’s account (the “Schedule”) and a Chinese receipt issued by Assen, it seems that the funds provided by P1 was in the nature of a loan, which is inconsistent with any claim of a resulting trust. However, just looking at the Schedule itself, the nature of the payment was unclear.

44.  Applying the test in Chan Chun Chuen v Kao, Lee & Yip (A Firm)[10], “a party who seeks to strike out a claim based on an abuse of process bears a heavy burden. The court will only do so in a plain and obvious case.”  I am of the view that the burden has not been discharged for the abuse of process ground.

Collateral Attack

45.  Ms Au submitted that: “the “undervalue” allegation constitutes a collateral attack on a previous binding decision of the Court and is abusive in light of the relevant circumstances.”  The decision referred to was that of DHCJ William Wong SC in HCB 4475/2002[11] upon Tang’s application to enforce Chung J’s order on 7 June 2016 for D5 to answer questions and provide documents. The relevant paragraphs of DHCJ William Wong SC’s decision are at paragraph 34:

“The essence of Mr Tang’s submission is that the auction sale resulted in a sale of the assets of the 1^st respondent at gross undervalue. However, Mr Tang adduced no expert evidence to support his submission that the subject property should be worth about HK$140 million instead of HK$9.2 million. I accept Mr Wong SC’s submission that Mr Tang’s affirmation evidence is opinion evidence and as such is not admissible as evidence for the purpose of this hearing.”

46.  As seen from above, there was no adjudication on whether the Auction Sale was in fact at an undervalue. At most it can be said that Tang had likewise on this occasion not provided any expert evidence in support of a plea of undervalue. However, at the present instance, we are concerned with whether there was an abuse of process in advancing such a plea. I am of the view that as there was no previous adjudication on the merits, the plea does not amount to a collateral attack on a previous binding decision.

47.  Mr Lung also submitted that P1 and P2’s reliance on section 60 of the Conveyancing and Property Ordinance (Cap.219) (“CPO”) was entirely misplaced as P1 was never a creditor of D1: the reverse was true, D1 was a creditor of P1. There can thus be no intent on D1’s part to defraud a creditor[12]; I agree:

(1)  D1 obtained Judgment via a mortgagee action and obtained possession against D3 and D4 over the Remaining Assen Lots and the Sky Fair Lots.

(2)  D1 as vendor was entitled to sell pursuant to the mortgages. P1 was never a creditor of D1. I cannot see how D1’s disposition of the sale proceeds can be said to defraud any creditor, least not P1. There is no authority cited in support of Mr Barlow’s submission that a “creditor” includes anyone prejudiced by such a transaction. I do not accept the submission.

48.  I agree that section 60 of the CPO does not apply and the undervalue allegation is not capable of reasoned argument, or cannot possibly succeed, and as such, such a plea is frivolous and vexatious[13] and ought to be struck out.

Disposition

49.  Based on the above, D1 and D5 succeed in their applications to strike out the ASOC on the ground that it discloses no reasonable cause of action.

50.  Mr Barlow in his oral submissions contended that should the court be of the view that there was no reasonable cause of action pleaded, the proper course to take is to allow P1 and P2 to further amend the statement of claim. Whilst I agree that in certain circumstances this may be the appropriate course, there was no summons before me, and more importantly, despite P1 and P2 having known of the attack on the inadequacy of the pleadings since the applications for striking out have been taken out, there was no draft amendments submitted before or at the any time during the hearing. It would be inappropriate to grant blanket leave for amendment in such circumstances.

51.  P1 and P2’s appeal is dismissed. I make an order in terms of paragraph 1 of D1’s summons dated 28 July 2023 and paragraph 1 of D5’s summons dated 25 July 2023.

52.  Costs follow the event. However, about 50% of the time at the hearing was devoted to the arguments on contractual estoppel, which I have rejected. I make a costs order nisi that the 1^st and 2^nd Plaintiffs do pay the 1^st and 5^th Defendants 50% of the costs of their Striking Out Summonses with certificate for one counsel, to be summarily assessed. The costs order nisi would become absolute if no application for variation is taken out within 14 days hereof.

53.  I thank counsel for their helpful assistance.