CHUGAI PHARMA USA, INC. v. CHENG YAN AND OTHERS

CACV 55/2025, [2026] HKCA 221

On appeal from [2025] HKCFI 251

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 55 OF 2025

(ON APPEAL FROM HCA NO 1326 OF 2023)

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REASONS FOR JUDGMENT

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Hon Kwan VP (giving the Reasons for Judgment of the Court):

1.  This appeal is brought by the 1^st defendant, Madam Cheng Yan (“D1”), against the summary judgment granted by Tam J on 10 January 2025 (“Judgment”)^[1]. For ease of reference, we will adopt the terms and expressions used in the Judgment.

2.  By the Judgment, the judge entered final judgment against D1 and ordered her to return HK$5,990,000 (“D1 Funds”) to the plaintiff, Chugai Pharma USA, Inc (“P”), as claimed in this action.  He also made a declaration that D1 holds the D1 Funds and any profits and interest thereon in whatever form which are traceable to the D1 Funds on constructive trust and/or resulting trust for P.  Interest and costs were awarded to P.

3.  We dismissed D1’s appeal with costs at the conclusion of the hearing as this appeal is entirely without merit.  The appeal seeks to challenge the judge’s assessment that D1’s assertions she was a bona fide purchaser for value without notice are not believable and is essentially a repetition of the arguments advanced by her counsel, Ms Sakinah Sat, before the judge.  As the judge has made a careful and thorough analysis of D1’s case as pleaded and the evidence she adduced, with which we agree on the whole, we will give succinct reasons why this appeal should be dismissed.

Background

4.  We do not propose to repeat the background matters set out in detail in §§2 to 22 of the Judgment.  A summary would suffice for present purpose.

5.  P, a corporation in the USA and the wholly owned subsidiary of a Japanese company, was the victim of a fraud perpetrated between 4 and 8 May 2023.  P was deceived into transferring funds of US$759,750 (on 4 May 2023), US$826,956 (also on 4 May 2023) and US$757,926 (on 8 May 2023) to the bank account of a bogus company BH Trading Limited (“BH Trading”) at the Hang Seng Bank in Hong Kong.  The total sums transferred amounted to US$2,344,632 (“Deceived Funds”).

6.  Of the Deceived Funds, BH Trading transferred the D1 Funds to D1’s bank account in CMB Wing Lung Bank (“D1’s Bank Account”). The transfers were made in 6 tranches, 3 on 8 May 2023 of HK$1 million each, the other 3 of HK$990,000, HK$1 million and HK$1 million on 9 May 2023.  There is no dispute that D1 did not have any prior dealing with P or with BH Trading.

7.  D1 resided in Hefei, Anhui Province in the Mainland and has been employed as the general sales manager of a company trading in medicine and medical equipment.  Her defence is that she made a loan of RMB 6,080,000 (“Loan”) to her good friend 黃麗萍 (“Madame Wang”), a Hong Kong resident, in December 2021 for the latter to set up a clubhouse in Chengdu for business meetings or events.  They signed a loan agreement on 1 December 2021 (“Loan Agreement”).  The Loan was for a term of 3 years with interest of 7% per annum.  RMB 6,080,000 was transferred by D1’s relative 王明強 (“Mr Wang”) to 6 recipients designated by Madame Wang in 7 tranches: 李進云 (RMB 700,000 on 13 December 2021; RMB 700,000 on 31 December 2021); 王帆 (RMB 550,000 on 13 December 2021); 合肥市村果藥業有限公司^[2] (RMB 3 million on 15 December 2021); 李锦锦 (RMB 700,000 on 21 December 2021); 于海峰 (RMB 230,000 on 29 December 2021); and 方建德 (RMB 200,000 on 31 December 2021).

8.  D1 alleged that Madame Wang arranged for the D1 Funds to be transferred into D1’s Bank Account in May 2023 as partial repayment of the Loan.  The repayment was for D1 to carry out her intended investments as she was to participate in the new Capital Investment Entrant Scheme (“New Scheme” or “CIES”) of the Hong Kong government with the view to become a Hong Kong resident.  D1 reached the “Repayment Agreement” with Madame Wang by telephone and at a meeting in Hefei.  They agreed orally that Madame Wang was to repay what the latter could raise at the time in Hong Kong dollars, being HK$5,990,000.

9.  D1 filed an affirmation on 14 October 2024 in support of her assertions.  The only documents^[3] adduced in support of the Loan are the Loan Agreement and the transfer records of the payments of RMB 6,080,000 to 6 recipients.  There is no document directly in support of the Repayment Agreement.  Any connection of the public documents in respect of CIES and the “in principle” approval given by the Immigration Department to D1’s application in October 2024 to the Repayment Agreement is so tenuous that they cannot be regarded as meaningful.  The total number of documents adduced in support of D1’s case can hardly be regarded as “numerous contemporaneous documents”, as stated by Ms Sat.  Neither Madame Wang nor Mr Wang provided an affirmation in these proceedings in support of the defence.

10.  The key issue before the judge was whether D1’s assertions are believable: (1) the Loan Agreement was entered into between D1 and Madame Wang in December 2021; and (2) the D1 Funds were partial repayments of the Loan by Madame Wang to D1 in May 2023.  The judge analysed D1’s pleaded case and the evidence adduced, and concluded that her assertions are not capable of belief.

This appeal

11.  The notice of appeal set out 5 grounds of appeal. Ms Sat grouped them into 3 grounds:

(1)    The judge erred in failing to apply or properly apply the test of whether D1’s assertions are believable or in finding that her defence is incapable of belief. (“Ground 1”)

(2)    The judge erred in embarking on a mini-trial on affidavit evidence. (“Ground 2”)

(3)    Alternatively, the judge erred in failing to consider granting conditional leave to defend. (“Ground 3”)

12.  P filed a respondent’s notice seeking to affirm the Judgment on these additional or alternative grounds:

(1)    D1 had constructive knowledge and/or notice of P’s proprietary interest in the D1 Funds as D1 failed to make any or any sufficient inquiries after receiving them.

(2)    The defence of bona fide purchaser for value without notice does not apply as no valuable consideration has passed from D1 to the immediate transferor of the D1 Funds, ie BH Trading.

(3)    The defence of bona fide purchaser for value without notice does not apply to P’s claim for restitution in personam^[4].

Legal principles

13.  The principles applicable to Order 14 applications are set out comprehensively in §§23 to 28 of the Judgment.  We see no need for repeating them.

14.  Both parties cited 9 other authorities to us on the relevant legal principles.  We do not think they add anything of value to the basic and established principles which have been applied by the courts regularly and consistently in Order 14 applications.

Ground 1

15.  Ms Sat submitted there is at least a possibility that D1 might be able to establish the defence of bona fide purchaser for value without notice, hence the judge was “plainly wrong” to disregard her defence.  She went through the reasons given by the judge in §§31 and 32 and contended that:

(1)    Insofar as the judge held there were inconsistencies between D1’s assertions in her pleadings and affirmation (the defence did not plead the involvement of Mr Wang, that the Loan was not paid to Madame Wang but to recipients designated by her, that the number of transfers were 6 not 7), these were not material inconsistencies.  It could further be explained that the amended defence did not descend into the same amount of details as in D1’s affirmation.  The amended defence had sufficiently pleaded the material facts of the Loan and the elements in support of the defence of bona fide purchaser for value without notice.

(2)    The judge was wrong to think it “remarkable” that the Loan Agreement was not even pleaded in the defence or amended defence.  D1 had pleaded the material facts.  In any event, in resisting an application for summary judgment, D1 could show cause by “affidavit or otherwise”^[5] to the satisfaction of the court^[6].

(3)    In raising doubts whether the Loan Agreement was a genuine instrument (it appeared to be crudely drafted, there is a “patent error” in the first sentence regarding the parties, the signatures and handwriting on the signing page look “rather cursory”), the judge erred in conducting a mini-trial and making speculative findings on affidavit evidence alone.  Besides, the “patent error” is just an isolated error in a homemade agreement and was not repeated in other parts of the document. 

(4)    In holding that the transfer records to the 6 recipients in 7 tranches do not support D1’s assertion of the Loan and it is just a bare assertion (the records do not show the transfers were related in any way to Madame Wang or D1, in 6 out of 7 transfer records it cannot even be seen that Mr Wang had provided the funds, the transfer record showing Mr Wang provided RMB 3 million was to pay a medicine company in Hefei and appears more likely to be paying D1’s related or designated party rather than Madame Wang’s), the judge failed to take into account that the transfer records were adduced by D1, and that the total amount of funds in the records tallies with the amount of the Loan.

(5)    The judge raised a number of queries (Why D1 had not made the transfers herself?  Why she needed to engage Mr Wang to do so?  Who was Mr Wang?  Why was he prepared to assist in transferring such large sums of money?  Had D1 reimbursed Mr Wang?  What was her arrangement with him?  How was the lesser repayment sum of HK$5,990,000 agreed?  Whether this sum included the accrued interest?  What was the balance of the Loan and when would it be due?  What about the apparent inconsistency of early repayment with clauses 4(2) and 5 of the Loan Agreement?) and regarded it significant that D1 had not produced any of these pertinent documents (records of communication how Madame Wang informed D1 or Mr Wang of the designated recipients and their bank account details; records showing the 7 transfers were received and acknowledged by Madame Wang; phone messages, call records or emails concerning D1’s request to Madame Wang for repayment; record of purchase of Madame Wang’s plane ticket to meet D1 in Hefei; entries or records made to register the partial repayment, the receipt thereof by D1, the outstanding balance of the Loan, and the interests paid or remaining).  In so doing, the judge had adopted the wrong approach and taken irrelevant matters into account. D1 had sufficiently condescended upon particulars in the pleadings and provided supporting documents.  She is not obligated to answer every query or present a perfect case to resist an Order 14 application.

(6)    The judge found it incredible to suggest that Madame Wang could have coincidentally arranged for the D1 Funds to be repaid to D1 and/or have done so innocently, given the close proximity in time of the transfers with the transfers of the Deceived Funds and the absence of any explanation by D1.  He also found it unbelievable that D1 had not made any further demands for repayment by Madame Wang after May 2023 and found her explanation for the need for repayment unconvincing and lacks credibility.  The questions raised by the judge should be put to D1 or her witnesses in cross-examination at the trial.  It should not be assumed on the affidavit evidence that she would have no answer to such questions.  She had deposed that she received oral confirmation from Madame Wang on the matters asserted and given sufficient particulars of the circumstances in which she requested repayment in her affirmation.

16.  The above contentions are not tenable.  We could detect no error in the judge’s approach or analysis.  We do not agree with Ms Sat that the inconsistencies in the pleadings and D1’s affirmation are not material, nor could the inconsistencies be explained away by the contention that the amended defence did not go into the same degree of particulars as the affirmation or that the defendant does not need a perfect case to resist an Order 14 application. 

17.  The valid questions raised by the judge and the lack of pertinent documents ought to have been addressed by D1 to give credence to her assertions, in particular, the absence of documents linking her and Madame Wang to the transfers of RMB 6,080,000 to 6 recipients and documents linking Madame Wang to the transfers of HK$5,990,000 to D1’s Bank Account.  The unanswered questions and the absence of contemporaneous documents are damning to the credibility of her assertions.  We reject the contention that the judge had taken irrelevant matters into account or that he had made speculative findings on affidavit evidence.  The judge was not obliged to suspend his critical faculties in considering whether D1’s assertions are believable.  He is entitled to test the assertions against inherent plausibility, the changes or inconsistencies in D1’s case, and the complete absence of contemporaneous documentary record of any kind expected to be generated in this electronic age. We agree with his assessment that D1’s assertions are not capable of belief.

18.  The citation of cases under this ground and Ground 2 does not assist Ms Sat.  The statements in the cases she relied upon must be read in the context of the facts of those cases, which are wholly distinguishable.

19.  It is not necessary to go into the debate whether in resisting an application under Order 14, there is a general rule that a defendant cannot show cause “by affidavit or otherwise” relying on a new defence that is not pleaded in the defence already filed, where there is no or no satisfactory explanation for the lateness^[7]. Even if D1 could do so by affidavit, she has plainly not shown cause to the satisfaction of the court in respect of her assertions for the reasons already mentioned.

Ground 2

20.  The complaint is that the judge conducted a mini-trial on affidavit evidence in taking issue with the genuineness of the Loan Agreement and the transfer records and he apparently suggested they were fabricated or were obtained, engineered or doctored to support D1’s assertions. He should not have reached this conclusion without P’s criticisms of the documents being explored with D1 and her witnesses in oral evidence, such that they have an opportunity to respond.  Further, in the absence of direct or compelling evidence, a finding of fraud or dishonesty on D1’s part cannot be made on affidavit evidence without a trial.  The judge was wrong in finding D1’s assertions incapable of belief based on suspicions and suppositions, without compelling evidence and without making any positive finding as to how the D1 Funds came to be paid into D1’s Bank Account.

21.  We do not think the above contentions add anything to those in Ground 1, which we have rejected.  The judge did not make findings on the genuineness of the documents adduced or on any fraud or dishonesty on D1’s part.  What he did was to test the documentary evidence against inherent probability, the context of the case, and other relevant circumstances in order to assess if D1’s assertion is believable.  It is not in dispute that part of the Deceived Funds, being the D1 Funds, was paid into D1’s Bank Account and that D1 did not have any prior dealing with P or BH Trading.  As mentioned in the Judgment at §6, there is clearly a prima facie case for judgment against D1, subject to any believable defence that may be put up by D1. There is no need to find how the D1 Funds came to be paid into D1’s Bank Account.

Ground 3

22.  We reject the contention that the judge erred in wholly failing to consider granting conditional leave to defend where the defence is considered “shadowy”.

23.  The judge did not consider the defence merely shadowy, he stated at §33 of the Judgment that he found D1’s defence “not capable of being believed”.  There is no error in granting summary judgment.

24.  As none of the grounds of appeal are of merit, it is not necessary to consider the additional grounds for supporting the Judgment in the respondent’s notice.