TOP POINT LTD v. K&L GATES (A FIRM OF SOLICITORS)

HCA 1088/2011

[2020] HKCFI 234

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1088 OF 2011

_____________

BETWEEN

	TOP POINT LIMITED	Plaintiff
	and
	K&L GATES (A FIRM OF SOLICITORS)	Defendant

________________________
(By Main Action)

AND BETWEEN

	K&L GATES (A FIRM OF SOLICITORS)	Plaintiff
	and
	GEMINIS FUNDS SPC	1st Defendant
	CAPITAL COSMOS FINANCIAL LIMITED	2nd Defendant
	EVENSTAR MASTER FUND SPC	3rd Defendant
	GEMINIS FINANCE LIMITED	4th Defendant
	GEMINIS CAPITAL INTERNATIONAL LIMITED	5th Defendant
	COSMOS MEDIA INVESTMENTS LIMITED	6th Defendant
	GENPOINT INTERNATIONAL LIMITED	7th Defendant
	JAMES TING-YEH YANG	8th Defendant

________________________
(By Counterclaim)

Before:

Hon Lok J in Chambers

Date of Hearing:	13 December 2018
Date of Decisions:	20 January 2020

________________________

D E C I S I O N

________________________

1.  This is an application by the Plaintiff in the Main Action and the Defendants in the Counterclaim by summons dated 18 January 2018 (“the Summons”) to strike out the following pleas in the Re-Amended Defence and Counterclaim (“RAD&C”) of K&L Gates (a firm of solicitors) (“the Firm”) which is the Defendant in the Main Action and the Plaintiff in the Counterclaim:

(i)  the words “or ought reasonably to have known” in the 5^th and 8^th to 9^th lines of §13; and

(ii)  the words “or ought to have known” in §32(2).

Background

2.  The background of this case has been set out in my earlier Decisions dated 13 September 2016.[1]

3.  This action is one of the many concerning the deposit of various “escrow funds” in the client account of the Firm. Unfortunately, one of the Firm’s lawyers, Mr Navin Aggarwal (“Aggarwal”), committed a massive fraud and as a result considerable sums of “escrow funds” went missing from the Firm’s client account.

4.  The Plaintiff in the Main Action, Top Point Limited (“Top Point”), sues as the assignee of the rights of the 1^st and 2^nd Defendants in the Counterclaim, Geminis Funds SPC and Capital Cosmos Financial Ltd respectively, under 2 escrow agreements pursuant to which a total “escrow fund” of US$4.5 million was paid into the Firm’s client account in May 2011 but was never repaid.

5.  Top Point applied for summary judgment which was heard by DHCJ L Chan (as he then was) on 6 December 2011.  It transpired that Top Point and the 1^st to 7^th Defendants in the Counterclaim are all offshore corporate vehicles owned and controlled by Mr James Yang (“Yang”), the 8^th Defendant in the Counterclaim.  These corporate vehicles are collectively referred to as “Yang’s Companies” and together with Mr Yang “the Top Point Parties”.

6.  According to the Firm, Yang’s Companies had signed 51 “escrow agreements” with Aggarwal and received payments thereunder from January 2009 to May 2011.  Over HK$88 million in purported fees and interest (excluding principals) were paid from the Firm’s client account to them, and they were paid more than HK$55 million over and above what they paid to the Firm.  Those which signed the “escrow agreements” were not necessarily those which deposited monies into the Firm, or those which received the enormous fees and interests.

7.  The Firm was given unconditional leave to defend, with costs.

8.  The Firm then amended the Defence and added a Counterclaim against the Top Point Parties with leave on 17 September 2012. The Firm’s case is that the purported escrow agreements are sham.  In any event, they are not binding on the Firm as Aggarwal had no actual or ostensible authority to execute them, and they do not fall within the Firm’s ordinary course of business.

9.  In the Counterclaim, the Firm has advanced the following causes of action against the Top Point Parties:

(i)  Aggarwal and the Top Point Parties had conspired to injure the Firm by unlawful means;

(ii)  the Top Point Parties had unlawfully assisted Aggarwal in his dishonest breaches of duties owed to the Firm, including misappropriating trust monies from the Firm’s client account by using the escrow agreements as a means to cover up;

(iii)  the Top Point Parties were in knowing receipt of monies which were paid to them by Aggarwal in breach of his fiduciary duties; and

(iv)  the Firm is entitled to restitution of monies dishonestly transferred to Yang’s Companies as money had and received.

10.  On the other hand, it is the Top Point Parties’ case that Aggarwal told Yang that he had some Mainland clients interested in acquiring substantial stakes in Hong Kong listed companies and required what is commonly referred to as “fund proof” to demonstrate that they had readily available funds, or ability to arrange funds within Hong Kong to finance the acquisitions. Yang then caused his companies to deposit monies into the Firm’s client account under the purported escrow agreements which enabled those “Mainland clients” to provide the requisite fund proof, in return of an “arrangement fee” for the provision of the funds.  It is their case that such fund proof was a normal and common arrangement in Hong Kong for substantial acquisitions by Mainland-based entities.

11.  This is disputed by the Firm.  According to it, proper fund proof in a general offer is regulated by the Securities & Futures Commission (“SFC”) under the Code on Takeovers and Mergers and Share Repurchase and nothing like the one depicted by the Top Point Parties.  In response, the Top Point Parties say that there are various types of fund proof in the financial market in Hong Kong, including the type Yang’s Companies were engaged in.

12.  Yang’s Companies had made various attempts to challenge the service of the Counterclaim outside jurisdiction.  All these challenges were rejected by the court.  In the Reasons for Decision handed down by DHCJ Seagroatt on 25 November 2013, the learned judge observed that the appeal lodged  by the Third Point Parties against the master’s decision was an “entirely unmeritorious appeal based on a pettifogging technicality which had already been corrected”[2], and the court found that the conduct of the Top Point Parties was “a waste of time and cost, entirely without merit, a cynical delaying tactic of the worst kind, an unacceptable abuse of the court process and a pointless attempt to circumvent the rationale and spirit of the Civil Justice Review.”[3]

13.  On 16 January 2015, Top Point obtained leave to re-amend its Statement of Claim.  The Firm filed the consequential RAD&C in February 2015.

14.  Expert directions were given on 11 August 2015. Discovery was completed in 2016.

15.  In the end of 2017, the Firm sought to progress the action by seeking to exchange expert reports and witness statements.

16.  The Top Point Parties issued the present Summons on 18 January 2018.  The Firm complains that the Summons was issued 6 years after the filing of the Amended Defence and Counterclaim where the phrase in question, “ought to have known”, first appeared.  The Firm contends that it is a belated attempt to take technical and meritless objections in an attempt to delay the trial of this action.

The relevant legal principles

17.  Having heard the parties’ submissions, there is no serious dispute about the legal principles relevant to the present application.

18.  First, it is only in plain and obvious cases that the court should exercise its power to strike out a pleading, and the burden lies on the applicant to establish that it is a proper case for striking out.

19.  Second, a “rolled-up plea”, i.e. plea which, on its face, alleges actual or alternatively constructive knowledge, is not treated as making two alternative allegations.  Instead, it is treated as a single allegation that a person ought to have known.[4] Therefore, where a claim involves an allegation of dishonesty or fraud which requires a plea of actual knowledge, and yet the pleader only makes a rolled-up plea, the claim is liable to be struck out for disclosing no reasonable cause of action or defence or being embarrassing.[5]

20.  Third, sham means “acts done or documents executed by the parties to the ‘sham’ which are intended by them to give to third parties or to the court the appearance of creating between the parties the legal rights and obligations different from the actual legal rights and obligation (if any) which the parties intend to create.”[6]

21.  Fourth, for a claim of conspiracy, it must be shown that there was a subjective intention on the part of the defendant to injure the plaintiff.[7]  Further, when pleading conspiracy to injure, “the special rule that allegations of fraud must be pleaded distinctly and with the utmost particularity…arises”.[8]

22.  Fifth, mere negligence or carelessness on the part of the defendant cannot sustain a case on sham or conspiracy to injure the plaintiff.

23.  The difference between the parties lies on how to apply these principles to the pleading concerned in the present case.  As I see it, the dispute is a narrow one.

The plea in relation to the “sham” claim

24.  First, as part of its defence based on “sham”, the Firm pleads at §13 of the RAD&C as follows:

“Further or in the alternative, [the Firm] avers that each and every one of the Purported Escrow Agreements was a sham which was never intended to take effect in accordance with its written terms. Geminis Funds and/or Capital Cosmos and/or [Top Point] and/or [Yang’s Companies] knew full well, or ought reasonably to have known, that they were lending to Aggarwal. They knew, or ought reasonably to have known, that Aggarwal was utilising the sums advanced, and that the money was not sitting in [the Firm’s] client account”.

25.  Mr Shieh, SC, counsel for the Top Point Parties, argues that such plea is bad, relying on the authorities relating to rolled-up plea and the meaning of “sham” as mentioned above[9].  It has further been laid down in Rossendale BC v Hurstwood Properties & Others[10] that “a transaction is only a sham if the parties to it had the common intention, which is necessarily a dishonest intention, that the transaction should not in fact create the legal rights and obligations which it gives the appearance of creating”.  Hence, Mr Shieh submits that, to make good the sham allegation, the Firm must unequivocally plead subjective and actual intention on the part of Aggarwal and the Top Point Parties to create different legal rights and obligations from those appearing from the escrow agreements.  A party cannot create a sham through negligence or carelessness.  The mere rolled-up plea cannot, therefore, sustain the sham allegation.  The plea is also embarrassing and liable to be struck out.

26.  On the other hand, Mr Sussex, SC, counsel for the Firm, submits that the Top Point Parties have misunderstood the Firm’s case.  The Firm is not seeking to establish its claim on sham against the Top Point Parties based on negligence.  In §13, the Firm has clearly pleaded that “each and every one ofthe Purported Escrow Agreements was a sham which was never intended to take effect in accordance with its written terms.” By making such express averment, there can be no doubt about the Firm’s case: Aggarwal and the Top Point Parties intended to give the impression that they agreed to the purported escrow agreements, whilst in fact they shared the common intention of not honouring their respective obligations or enjoying their respective rights under them.

27.  According to Mr Sussex, the phrase “ought reasonably to have known” therefore must mean something else.  The only requisite common intention of Aggarwal and the Top Point Parties was that they didn’t mean to create the legal relationship as stated in the purported escrow agreements, but wanted to create an impression for third parties that they did.  Apart from that, their actual intention needed not align.  They intended some other arrangement to bind them, but they could have intended different things.

28.  The second and the third sentences at § 3 plead what the Firm says was in the Top Point Parties’ mind to be the real arrangement (which was different from the arrangement as stated in the purported escrow agreements).  They knew, or ought reasonably to have known, that they were lending to Aggarwal.

29.  Mr Sussex maintains that it is not the Firm’s case that “the escrow agreements are sham agreements in that both contracting parties knew or ought reasonably have known that the escrow agreements would not in fact be performed”.  The Firm’s case is that the purported contracting parties positively knew that the escrow agreements would not in fact be performed, and hence the plea “never intended to take effect in accordance with [their] written terms”.  Moreover, in assessing the evidence, the court looks at not only the documents but the external evidence.  Therefore, the actual and constructive knowledge of the Top Point Parties concerning what the real arrangement was, is relevant to the court’s assessment.  In other words, the exercise in ascertaining such constructive knowledge will not be a futile line of investigation as suggested by the Top Point Parties.

30.  In my judgment, if that is the meaning of the Firm’s case, it should have been made clear in the pleading itself.  It is true that the Firm has pleaded that the each of escrow agreements “was a sham which was never intended to take effect in accordance with its written terms”, but the same paragraph goes on to say that the Top Point Parties knew and ought reasonably to have known that they were in fact lending to Aggarwal and Aggarwal was using the monies himself.  It certainly gives the impression to the reader, or at least it is one of the possible constructions of §13 of the RAD&C, that constructive knowledge of the “real” purpose of the escrow agreements, i.e. to lend money to Aggarwal himself, is sufficient to establish the subjective intention that the Top Point Parties had never intended the escrow agreements to take effect as per their written terms.

31.  It is now clear from Mr Sussex’s submissions that constructive knowledge of the “real” purpose of the arrangement was only an evidential matter to be relied upon by the Firm to establish by inference the subjective fraudulent intention of the Top Point Parties regarding the “sham” escrow agreements.  But without qualifying the phrase “ought reasonably to have known”, it gives at least a misleading impression that carelessness or negligence on the part of the Top Point Parties is, by itself, sufficient to substantiate the “sham” allegation.  As laid down in Aktieselskabetdansk Skibsfinansiering v Wheelock Marden & Co Ltd & Ors[11],allegations of fraud “must be pleaded distinctly and with the utmost particularity”.  Though that was a case on conspiracy to injure, the same principle applies.

32.  Undoubtedly, the subjective intention and knowledge of the Top Point Parties regarding the escrow agreements are one of the main issues in the present case.  As the Firm’s case is, to a great extent, built upon the fraudulent intention of the Top Point Parties, allegations of fraud need to be expressly pleaded, so that the Top Point Parties know exactly the case that they have to meet at the trial.

33.  At the very least, §13 of the RAD&C will have to be amended to clarify the Firm’s case as now contended for by Mr Sussex.  I therefore strike out both phrases “or ought reasonably to have known” in §13, but I also grant general leave to the Firm to amend §13 to particularize its case as formulated by Mr Sussex, if necessary, within 21 days.

The plea in relation to the conspiracy claim

34.  As part of its counterclaim for conspiracy to injure by unlawful means, the Firm pleads at §32(2) that:

“32.In the circumstances, on or before 19^th January 2009 Aggarwal, Mr James Yang and Mr Yang’s Companies conspired together to injure [the Firm] by unlawful means, the conspiracy can be inferred from the following overt acts:

Particulars of overt acts

… … …

(2)By reason of the unusual nature of the Purported Escrow Agreements, Mr James Yang and/or Mr Yang’s Companies knew or ought to have known that he / it was / they were dealing with Aggarwal personally, who was taking loans from Mr Yang’s Companies wholly unconnected with his professional status as a solicitor or with the business of the Defendant”.

35.  Mr Shieh relies on the authority mentioned in §21 above to show that, for the tort of conspiracy to injure, the intention must be one of actual subjective intention to injure.  Further in Total Lubricants Hong Kong Limited v Christophe de la Cropte de Chanterac[12], the Court of Appeal accepted the proposition that:

“the tort of conspiracy by unlawful means requires an intention to cause loss by unlawful means and that a defendant may avoid liability on the basis that it did not have the requisite intent to injure the plaintiff on the basis that it believed it was entitled to act as it did, even if it knew it would cause loss.”

36.  By incorporating the phrase “ought to have known”, Mr Shieh submits that the plea in §32(2) of the RAD&C is bad because the Firm is suggesting that carelessness or negligence is sufficient to establish the necessary subjective intention for the tort of conspiracy to injure.

37.  On the other hand, Mr Sussex argues that it is clearly the Firm’s case the Top Point Parties had the actual intention to injure.  It is pleaded at §32 that they “conspired together to injure [the Firm] by unlawful means”.  What are pleaded in §32(2) are the overt acts from which the court can infer the conspiracy, namely, the Top Point Parties had actual or “blind-eye” (Nelsonian or constructive) knowledge that they were dealing with Aggarwal personally, who was taking loans from them unconnected with his professional status as a solicitor, or the business of the Firm.

38.  According to Mr Sussex, the relevant state of mind of the conspirator in a claim of conspiracy to injure by unlawful means can include “blind-eye” knowledge, which involves a deliberate decision not to inquire into matters which were obvious and specific, and that approximates to knowledge.

39.  In support of such proposition, he refers me to the cases of De Krassel v Chu Vincent[13], and Bank of Tokyo-Mitsubishi UFJ Ltd & Anor v Baskan Gida Sanayi Ve Pazarlama AS & Ors[14], both citing the following passage in Manifest Shipping Co Ltd v Uni-Polaris Insurance Co Ltd[15]:

“’Blind-eye’ knowledge approximates to knowledge. … … It is, I think, common ground – and if it is not, it should be – that an imputation of blind-eye knowledge requires an amalgam of suspicion that certain facts may exist and a decision to refrain from taking any step to confirm their existence. … … a person who refrained from asking questions, not because he was an honest blunderer or a stupid man, but because he thought in his own secret mind – I suspect there is something wrong, and if I ask questions and make further inquiry, it will no longer be my suspecting it, but my knowing it, and then I shall not be able to recover. Lord Blackburn added ‘I think that is dishonesty’.”

40.  It is the Firm’s case that the Top Point Parties had at least “blind-eye” knowledge that their dealings with Aggarwal were unconnected with the Firm or Aggarwal’s professional status.  Indeed, the Top Point Parties gave misleading and inaccurate representations to the SFC about their dealings involving the purported escrow agreements and the exorbitant fees and interest they received from the Firm’s client account.

41.  Mr Sussex further submits that, even if the relevant state of mind of the conspirator in a claim of conspiracy to injure by unlawful means does not include “blind-eye” knowledge, the plea that the relevant parties ought to have known by reason of the facts pleaded is relevant to the court’s assessment, or inference, as to whether any actual knowledge existed.  The court would be entitled to conclude that any reasonable person in the position of the Top Point Parties ought to have known that they were dealing with Aggarwal personally, and from that to infer (in the absence of any evidence that they were somehow disabled from drawing a conclusion which any reasonable person would draw) that they did in fact know.  If there is any doubt or uncertainty on the law as to the quality of the knowledge required to establish a claim in unlawful means conspiracy, it is inappropriate to strike out the claim given that it is in an area of the law which is in the process of developing, relying on the case of Tadjudin Sunny v Bank of America, National Association[16].

42.  In my judgment, the same criticism can be made against the plea in §32(2).  If it is the Firm’s case that it would rely on “blind-eye” knowledge and not just carelessness or negligence on the part of the Top Point Parties, it should have been made clear in the pleading.  As mentioned above, the Firm’s case against the Top Point’s Parties is, to a great extent, built upon the allegation of fraud.  It is contended that they conspired with Aggrawal in a fraudulent way to injure the Firm.  The case of Aktieselskabetdansk Skibsfinansiering v Wheelock Marden & Co Ltd & Ors[17] has made it clear that, when pleading conspiracy to injure, allegations of fraud “must be pleaded distinctly and with the utmost particularity”.

43.  There is certainly a great difference between the phrase of “ought to have known” (which suggests carelessness and negligence) and “blind-eye” knowledge (which suggests something like recklessness or turning a blind-eye to something that is quite obvious).  For the purpose of the present application, I am prepared to accept the Firm’s case that “blind-eye” knowledge may “[approximate] to knowledge”.  However, to avoid confusion and embarrassment, the pleading should be amended to make to clear that the Firm is not relying on mere constructive knowledge, or carelessness or negligence, to support the claim on conspiracy to injure.

44.  Hence, I also strike out the plea of “ought to have known” in §32(2).  Likewise I grant general leave to the Firm to amend §32 to particularize its case as now formulated by Mr Sussex, if necessary, within 21 days.

Delay

45.  I agree that there was substantial delay in the making of the present striking out application.  However, I accept the submission of Mr Shieh that where a claim or defence is unsustainable as a matter of law, the timing of the application to strike out is less critical.[18] In Ko Hon Yue v Chiu Pik Yuk[19], Ma CJ said the following:

“Obviously, where a claim or defence is unsustainable as a matter of law, the timing of the application to strike out is less critical…[on the other hand] where proceedings may constitute an abuse on the basis that it would be vexatious for a court to try the case, the sooner this is dealt with the better; otherwise the very evils sought to be avoided (the wastage of time and resources causing vexation or harassment of the other party) would continue to accumulate”

46.   The Chief Justice further observed that[20], where a striking out application is made on the basis that no reasonable cause of action or defence existed, “a court may well find it appropriate to deal with the application” even if discovery has already taken place, the parties’ witness statements have been exchanged and all other preparations have been made for the trial.

47.  On the basis of such dicta, the factor of delay should not carry any significant weight.  In any event, the case is yet ready for trial and this application does not affect any milestone date.

48.  I therefore make the order as mentioned in §§33 and 44 above. The Top Point Parties would be at liberty to make a further striking out application if the amendments are not in line with the Firm’s case as now formulated by Mr Sussex.  If the Firm does further amend the RAD&C, the Top Point Parties would have leave to file consequential amendments within 14 days thereafter.

49.  Taking into account the delay, I make a costs order nisi that the costs of and occasioned by the Summons, including the costs of the amendments of the pleadings, be the Top Point Parties’ costs in the cause, which shall be made absolute 21 days after the date of the handing down of the Decision.

50.  As discussed in the hearing, I also direct the parties to fix a case-management conference before me with 30 minutes reserved.

	(David Lok)
	Judge of the Court of First Instance
	High Court

Mr Paul Shieh, SC and Ms Bonnie Y K Cheng, instructed by Tse Yuen Ting Wong, for Plaintiff in the Main Action and the Defendants in the Counterclaim

Mr Charles Sussex, SC and Ms Frances Lok, instructed by Robertsons, for the Defendant in the Main Action and the Plaintiff in the Counterclaim

   

HCA 1088/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1088 OF 2011

_____________

BETWEEN
	TOP POINT LIMITED	Plaintiff
and
	K&L GATES (A FIRM OF SOLICITORS)	Defendant
	(By Main Action)
AND BETWEEN
	K&L GATES (A FIRM OF SOLICITORS)	Plaintiff
and
	GEMINIS FUNDS SPC	1st Defendant
	CAPITAL COSMOS FINANCIAL LIMITED	2nd Defendant
	EVENSTAR MASTER FUND SPC	3rd Defendant
	GEMINIS FINANCE LIMITED	4th Defendant
	GEMINIS CAPITAL INTERNATIONAL LIMITED	5th Defendant
	COSMOS MEDIA INVESTMENTS LIMITED	6th Defendant
	GENPOINT INTERNATIONAL LIMITED	7th Defendant
	JAMES TING-YEH YANG	8th Defendant
	(By Counterclaim)

_____________

Before: Hon Lok J in Chambers

Date of Hearing: 17 & 18 February 2016

Date of Decisions: 13 September 2016

___________________

DECISIONS

___________________

1.  There are 2 cross-applications before me dealing with the consequences of alleged failures by both camps in this action to disclose documents:

(i) the summons dated 10 July 2015 (“the Firm’s Summons”) by the Defendant in the Main Action and the Plaintiff in the Counterclaim, K&L Gates (a firm of solicitors)(“the Firm”), for the  dismissal of the Main Action and entering of judgment on the Counterclaim for the failure to comply with the unless order made by Master M Wong on 9 October 2014 (“the Unless Order”); and

(ii) the summons dated 23 September 2015 (“the Top Point Parties’ Summons”) by the Plaintiff in the Main Action and the Defendants in the Counterclaim (“the Top Point Parties”) for striking out of the Firm’s Re-Amended Defence and Counterclaim and the entering of judgment on the Main Action for failure to comply with the order for discovery made by Master M Wong on 14 July 2015 (“the Discovery Order”).

BACKGROUND

2.  This action is one of the many concerning the deposit of various “escrow funds” in the client account of the Firm. Unfortunately, one of the Firm’s lawyers, Mr Navin Aggarwal (“Aggarwal”), committed a massive fraud and as a result considerable sums of “escrow funds” went missing from the Firm’s client account.

3.  The Plaintiff in the Main Action, Top Point Limited (“Top Point”), sues as the assignee of the rights of the 1^st and 2^nd Defendants in the Counterclaim, Geminis Funds SPC (“Geminis Fund”) and Capital Cosmos Financial Ltd (“Capital Cosmos”) respectively, under 2 escrow agreements pursuant to which a total “escrow fund” of US$4.5 million was paid into the Firm’s client account in May 2011 but was never repaid.

4.  Top Point applied for summary judgment which was heard by DHCJ L Chan (as he then was) on 6 December 2011.  It transpired that Top Point and the 1^st to 7^th Defendants in the Counterclaim are all offshore corporate vehicles owned and controlled by Mr James Yang (“Yang”), the 8^th Defendant in the Counterclaim.  These corporate vehicles are collectively referred to as “Yang’s Companies” and together with Mr Yang “the Top Point Parties”.  The Top Point Parties are all represented by Messrs Tse Yuen Ting & Wong (“TYTW”).

5.  According to the Firm, Yang’s Companies had signed 51 “escrow agreements” with Aggarwal and received payments thereunder from January 2009 to May 2011.  Over HK$88 million in purported fees and interest (excluding principals) were paid from the Firm’s client account to them, and they were paid more than HK$55 million over and above what they paid to the Firm.  Those which signed the “escrow agreements” were not necessarily those which deposited monies into the Firm, or those which received the enormous fees and interests.

6.  The Firm was given unconditional leave to defend, with costs.

7.  The Firm then amended the Defence and added a Counterclaim against the Top Point Parties with leave on 17 September 2012. The Firm’s case is that the purported escrow agreements are sham.  In any event, they are not binding on the Firm as Aggarwal had no actual or ostensible authority to execute them, and they do not fall within the Firm’s ordinary course of business.

8.  On the other hand, it is the Top Point Parties’ case that Aggarwal told Yang that he had some Mainland clients interested in acquiring substantial stakes in Hong Kong listed companies and required what is commonly referred to as “fund proof” to demonstrate that they had readily available funds, or ability to arrange funds within Hong Kong to finance the acquisitions. Yang then caused his companies to deposit monies into the Firm’s client account under the purported escrow agreements which enabled those “Mainland clients” to provide the requisite fund proof, in return of an “arrangement fee” for the provision of the funds.  It is their case that such fund proof was a normal and common arrangement in Hong Kong for substantial acquisitions by Mainland-based entities.

9.  This is disputed by the Firm.  According to it, proper fund proof in a general offer is regulated by the Securities & Futures Commission (“SFC”) under the Code on Takeovers and Mergers and Share Repurchase and nothing like the one depicted by the Top Point Parties.  In response, the Top Point Parties say that there are various types of fund proof in financial market in Hong Kong, including the type Yang’s Companies were engaged in.

10.  Yang’s Companies had made various attempts to challenge the service of the Counterclaim outside jurisdiction.  All these challenges were rejected by the court.  In the Reasons for Decision handed down by DHCJ Seagroatt on 28 November 2013, the learned judge observed that the appeal lodged  by the Third Point Parties against the master’s decision was an “entirely unmeritorious appeal based on a pettifogging technicality which had already been corrected”[1], and the court found that the conduct of the Top Point Parties was “a waste of time and cost, entirely without merit, a cynical delaying tactic of the worst kind, an unacceptable abuse of the court process and a pointless attempt to circumvent the rationale and spirit of the Civil Justice Review.”[2]

11.  Instead of the Top Point Parties, the Firm took out the case management summons on 12 March 2014.

12.  On 16 January 2015, Top Point obtained leave to re-amend its Statement of Claim.  The amended pleadings were exchanged in January and February 2015.  Because of the protracted history of the case, it took quite some time for the pleadings to be finally closed.

THE FIRM’S SUMMONS

13.  The Top Point Parties filed their list of documents on 24 February 2014.  On 21 May 2014, the Firm took out a summons (“the Discovery Summons”) seeking a further and better list of documents and specific discovery of 5 classes of documents.

14.  Class 2 of the schedule of the Discovery Summons provides for the provision of the following class of documents (“Class 2 Documents”):

“Communications by [the Top Point Parties] with the SFC in relation to the escrow agreements and mandates the subject of this Action.”

15.  Class 1 of the schedule comprised internal communications of the Top Point Parties.  Classes 3, 4 and 5 comprised Top Point Parties’ audited accounts, tax returns and similar fund proof or escrow agreements.

16.  On 22 July 2014, the Top Point Parties filed their 1^st Supplemental List of Documents.  In September 2014, there were without prejudice discussions ensued in respect of the withdrawal of the Discovery Summons.

17.  On 9 October 2014, with the consent of the parties, Master M Wong made the Unless Order.  §2 of the Unless Order provides that:

“Unless [the Top Point Parties] do file and serve a further supplemental list of documents by 5:00 pm on 31 October 2014 in relation to classes 1 and 2 of the schedule to [the Discovery Summons], the claim against [the Firm] be dismissed and [the Firm] be at liberty to apply for judgment of its Counterclaim against [the Top Point Parties].”

18.  The parties also agreed for the Firm to withdraw the Discovery Summons with no order as to costs.  Apparently, these 2 classes of documents are the ones that require further disclosure.

19.  Just before the deadline, the Top Point Parties filed a 2^nd Supplemental List of Documents in purported compliance with the Unless Order (“the 2^nd Supplemental List”).  The 2^nd Supplemental List contained 520 items.  5 lever-arch files of copied documents were provided to the Firm on two occasions on 7 and 18 November 2014.

20.  After more than 6 months, the Firm’s solicitors, Messrs Robertsons (“Robertsons”), wrote to TYTW on 29 May 2015, pointing out that the Top Point Parties had breached the Unless Order.  In particular, it was the Firm’s case that the Top Point Parties had not disclosed any Class 2 Documents.

21.  It was then followed by a chain of lengthy argumentative correspondence between the parties as to whether there was such breach.  In one of the letters by the Top Point Parties dated 18 June 2015, they maintained that the Unless Order was made by consent.  Further, the Top Point Parties claimed that all the documents included in the 2^nd Supplemental List were the documents which they were able to locate at the moment and which they considered to be relevant for disclosure.  They would continue to disclose documents to the Firm in order to fulfil their continuing obligation of discovery.

22.  Robertsons refuted the arguments of the Top Point Parties in their letter dated 25 June 2015, and asked whether the Top Point Parties would consent to approaching the SFC seeking copies of the Class 2 Documents.  TYTW replied a week later saying that they were still “taking instructions”.  The Firm issued the Firm’s Summons on 10 July 2015.

23.  On 17 July 2015, Yang filed his 7^th Affirmation on behalf of the Top Point Parties to oppose the Firm’s Summons.  He tried to give an account of the efforts made by the Top Point Parties in complying with the disclosure of the Class 2 Documents.  In essence, Yang said he instructed his solicitors to search the emails of two staff of Evenstar Master Fund SPC (“Evenstar”) which is the 3^rd Defendant in the Counterclaim, namely Mr Horace Chow and Mr Karvan Wong (“Evenstar’s 2 Staff”).  According to Yang, Evenstar’s 2 Staff were the only persons responsible for communicating with SFC relating to the escrow agreements.  It was said nothing could be found.  He added a “caveat” that, in discharging their ongoing discovery obligation, the Top Point Parties would continue to disclose other relevant documents if they were able to locate them in the future.

24.  About a month after the Firm’s Summons, the Top Point Parties filed a 3^rd Supplemental List of Documents (“the 3^rd Supplemental List”), which produced emails (“Liu’s Emails”) between Mr Richard Liu of Geminis Advisory Limited (“GAL”) and the SFC.  GAL is not a party in the present proceedings.  In his 8^th Affirmation, Yang gave the following explanation:

“ ... ... I gave further thought to the Top Point Parties’ discovery in respect of the Class 2 Documents - in particular the sources of documentation there might be – either in the particular or similar categories.  While I do not understand it to be within the scope of the order, it seemed possible to me there might in fact be one further source: Geminis Advisor Limited (“GAL”).  GAL is not party to these proceedings but as Geminis Fund SPC’s relevant advisory company, have had communications with the SFC which could assist a court resolving this dispute.”

Yang then carried on arguing that the items produced in the 3^rd Supplemental List did not fall within the ambit of Class 2 Documents.

25.  The Firm complains that the documents contained in the 3^rd Supplemental List, i.e. Liu’s Emails, clearly fall within the meaning of Class 2 Documents.  As the Top Point Parties had failed to comply with the Unless Order in disclosing the Class 2 Documents before the deadline, the sanction should take effect.

(i) The relevant legal principles

26.  A breach of an unless order can occur in a number of ways.  It may be the case that the defaulting party has simply failed to do anything before the deadline (eg. failing to file any list of documents at all), or that the alleged defaulting party has done certain thing before the deadline (eg. filing a list of documents), but the other side complains that the compliance is insufficient (eg. the list is incomplete or deficient).

27.  The Firm argues that there was no compliance so far as Class 2 Documents are concerned.  On the other hand, the Top Point Parties contend that there was proper compliance with the Unless Order by the filing of the 2^nd Supplemental List, and some of the documents contained therein were arguably Class 2 Documents.  Unless the Firm can establish that the filing of such List was illusory or made in bad faith, there was proper compliance on the part of the Top Point Parties.  There is also a dispute as to whether the Liu’s Emails do fall within the meaning of Class 2 Documents. If they are not Class 2 Documents, the case on non-compliance must fail.

28.  The proper approach to an alleged breach of an unless order has been considered in a number of local authorities.

29.  In Ka Wah Bank Ltd  v Low Chung-song[3], orders were made that the defences of the respondents be struck out unless they filed a list of documents and a verifying affirmation within 14 days.  A list and affirmation were filed within 14 days, but the lists were incomplete and the affirmation gave an address at which the respondents could not be contacted, because they had instructed persons there to deny knowledge of them.  The Court of Appeal approved the principles in Reiss v Woolf[4] and held that the defences should be struck out.  The Court found that the lists of documents were illusory and displayed no evidence of a conscientious effort to meet the respondents’ obligations on discovery.  There was no evidence whatever that the respondents had acted in good faith over the matter of the deliberately misleading address they had given.

30.  In Lau Chi Wang v Ip Fook Chuen[5], the unless order was for the 1^st and 2^nd defendants to file an affidavit giving specific discovery of certain documents as ordered. There was disagreement between the parties as to whether the specific discovery made by the defendants was sufficient.  Sakhrani J held that the unless order was a time order.  In such case, following the principles in Reiss v Woolf[6], a default referred to a default in the delivery of a document within the specified time.  This did not mean that any document would suffice.  It must be a document made in good faith which was not illusory.  The learned judge found that the discovery made by the 1^st defendant in his affirmation was not illusory, as there was a genuine conflict of opinion which could only be resolved by further adjudication on an application.

31.  In Daimler AG v Leiduck[7], the unless order was for the plaintiff to answer certain interrogatories in an inquiry as to damages proceedings.  Consequently, the senior legal counsel of the plaintiff made an affirmation claiming legal professional privilege in respect of certain interrogatories.  For one other interrogatory, the legal counsel explained that, due to certain misunderstanding, such interrogatory was based on a false premise.  In any event, the filing of the answers missed the deadline by 30 minutes and 107 minutes respectively.

32.  The Court of Appeal held that it was not possible to reject the legal counsel’s explanation at the interlocutory stage.  There was no basis for holding that the claim to legal professional privilege was advanced in bad faith or that the plaintiff did not genuinely believe it was entitled to answer the interrogatories in that way.  The Court rejected the argument that those answers were no answers at all.  Had the answers been filed within time under the unless order, the automatic sanction would not have taken effect.  As to the failure to file the answers in time, the Court granted relief from sanction and so the Points of the Defence of the plaintiff was reinstated.

33.  In Re AJK Co Ltd[8], an unless order was made requiring the plaintiff to file and serve answers to requests for further and better particulars of her reply.  Answers were filed within time.  However, the answers were served on the wrong party by mistake which was rectified on the following day.  There was also an issue as to whether the answers provided were deficient.  Anthony Chan J held that the proper approach to an alleged breach of an unless order was set out in Lau Chi Wang[9], applying Reiss v Woolf[10]. The issue of compliance turned on whether the deadline was met and not on the adequacy of compliance, eg whether the request for particulars was sufficiently answered, unless it could be said that the compliance was not made in good faith or illusory.  That approach remained binding in Hong Kong though it was no longer followed in England.  When the court considered the question of compliance, the exercise was not to put the matters under the microscope.  The test was whether the compliance was clearly inadequate.  If so, relief should not be granted.  Otherwise, any arguments over adequacy of compliance should be resolved in a further application.

34.  Having considered these authorities, it is clear that an unless order even requiring specific discovery of certain kinds of documents should be construed as a time order, and the issue will therefore turn upon whether the deadline has been met and not on the adequacy of compliance, unless it can be said that the compliance is not made in good faith or illusory.

35.  On the other hand, the Firm advocates for a stricter test.  According to Mr Sussex SC, counsel for the Firm, there is a distinction between unless order dealing with the time of compliance on the one hand and mode of compliance on the other.  Whether it is a case of the former or latter is a question of construction depending on the facts of each case. The Unless Order here falls within the latter category.   It is specific not only in terms of the time of compliance, but also on the mode of compliance by specifying the contents of the supplemental list of documents to be filed by the prescribed time.  In other words, not any supplemental list of documents would suffice, the list must disclose, inter alia, the Class 2 Documents. In a situation like this, the Firm, relying on the case of Hytec Information Systems Ltd v Coventry City Council[11], argues that the only sufficient exoneration will almost inevitably require that the defaulting parties satisfy the court that something beyond their control caused their failure to comply with the order.  There is none in this case.  If a party intentionally or deliberately flouts the unless order, then he can expect no mercy from the court.

36.  Despite the able submission of Mr Sussex, I do not accept his argument.  First, such submission does not sit well with dicta in the various local authorities mentioned above, in which the courts accepted that unless order requiring the filing of a further list of documents relating to certain kinds of documents is a time order.  Second, the Unless Order required the Top Point Parties to do a certain act, i.e. to file a further list of documents, by a specified time.  The fact that the Unless Order specifies a mode of compliance or specifies the contents of the list does not alter the nature of the Unless Order which is a time order.  Hence, I refuse to adopt the stricter test as advocated by the Firm.

(ii) Whether the compliance was made in bad faith or illusory?

37.  As the Top Point Parties had filed the 2^nd Supplemental List before the deadline, the question before the court is, therefore, whether such purported compliance with the Unless Order was made in bad faith or illusory.  Having carefully considered the facts of the present case, I answer such question in the negative.

38.  First, the Top Point Parties had made a serious attempt to comply with the Unless Order.  520 items had been disclosed in the 2^nd Supplemental List.  It is not the Firm’s case that none of these documents fall within Class 1 of the Discovery Summons, and so there must at least be compliance with that part of the Unless Order.  If the Top Point Parties had made serious attempt to comply with at least part of the Unless Order, it is very difficult for the court to say that the filing of the entire 2^nd Supplemental List was made in bad faith or illusory.

39.  In respect of the Class 2 Documents, Yang in his 7^th Affirmation gave the following explanation:

(i) between January 2009 and June 2011, there was only direct communication between Evenstar (one of the Top Point Parties) and SFC, but no direct communication between the other entities of the Top Point Parties;

(ii) the persons in Evenstar responsible for communicating with the SFC were Evenstar’s 2 Staff;

(iii) for the purpose of complying with the Unless Order in respect of the Class 2 Documents, Yang arranged for all the emails of Evenstar’s 2 Staff in the period from January 2009 to June 2011 to be sent to his solicitors for review, which constituted 17 GB of data volume comprising 120,000 emails; and

(iv) the solicitors then conducted keyword searches on certain words which might relate to Class 2 Documents and caused the documents revealed from the search (over 2,500 search results) to be disclosed.

40.  Mr Sussex argues that there was no reason for restricting the search to emails of Evenstar’s 2 Staff.  However, as there is no opportunity of cross-examining Yang at this interlocutory stage, there is no sufficient basis for the court to reject Yang’s explanation in this regard, in particular it would be draconian for the court to deprive the Top Point Parties of their rights to be heard by the court on the substantive merits of the case.  As the Top Point Parties had made attempt to locate the Class 2 Documents, I do not consider that the filing of the 2^nd Supplemental List was made in bad faith or illusory.

41.  Second, it is the Firm’s case that there had been no compliance with the Unless Order so far as Class 2 Documents are concerned.  However, there was genuine dispute between the parties as to whether some of the documents included in the 2^nd Supplement List were Class 2 Documents.  In fact, Robertsons confirmed in a letter dated 29 May 2015 that there was “a solitary email (item 412) which comes within [Class 2]”. If there was a genuine doubt as to whether there was some compliance with Class 2 Documents, it is hard to say that the 2^nd Supplemental List was an illusory one.

42.  Third, there was another genuine dispute between the parties as to whether the Liu’s Emails (documents disclosed in the 3^rd Supplemental List) do fall within the meaning of Class 2 Documents.  The exact words used to describe Class 2 Documents are “communications by the 1^st-8^th Defendant (by Counterclaim) with the SFC”.  On the face of those words, it does not include communications by anyone other than the Top Point Parties.  GAL is not one of the Top Point Parties and so it is arguable that the Liu’s Emails do not fall within the ambit of Class 2 Documents.

43.  The exact words used in the Unless Order are important.  As observed by Tuckey LJ in Realkredit v York Montague[12], the dismissal of an action at an interlocutory stage is a very serious matter and may well work injustice.  It is imperative that the thing to be done in order to avoid dismissal of the action should be specified in the clearest and most precise language, so that it may be possible for the party on whom the necessity of doing the act lies to be in no doubt whatsoever as to the steps which he is to take if he is to avoid his action being dismissed.  In other words, the applicant must show that the language of the order is sufficiently precise and that which the order contemplates has occurred.[13]  DHCJ Saunders had also made similar observation in Chinacast Education Corporation v Chan Tze Ngon[14].

44.  Mr Sussex submits that the Liu’s emails clearly fall within the ambit of Class 2 Documents as those emails were all copied to Yang.  However, it is quite arguable that the Unless Order does not cover emails copied to Yang simpliciter.  None of those emails was sent by Yang or otherwise received by him in such a way so as to constitute “communications by” him and the SFC.  Further, the Evenstar’s 2 Staff were the persons responsible for communicating with the SFC relating to the escrow agreements, and the Top Point Parties had made attempt to locate the documents by referring to the express words used in the Unless Order.  In the circumstances, it was not unreasonable for Yang to have overlooked those emails which had been copied to him, or to have restricted the keyword searches to be conducted on the emails of the representatives of the only Top Point Parties (i.e. Evenstar’s 2 Staff) that directly communicated with the SFC. 

45.  As a matter of fact, just the emails of the Evenstar’s 2 Staff turned up over 120,000 emails.  Compliance with the Unless Order was therefore a laborious exercise, and there might be innocent failure to disclose documents which may be relevant.  Provided that a party acts bona fide and the approach taken was reasonable, which I have no reason to doubt that was the case here, a party should not face criticism or adverse consequences if it should transpire that, despite best effort, some documents slipped through the net.[15]

46.  Mr Sussex also argues that the conduct of the Top Point Parties in the course of these proceedings shows bad faith on their part.  They adopted delaying tactics by lodging various jurisdictional challenges to the service of the Counterclaim.  They failed to make proper disclosure that necessitated the taking out of the Discovery Summons.  After having agreed to the Unless Order, the Top Point Parties put forth a succession of hopeless arguments to justify the non-compliance of the Unless Order.

47.  I do not accept that these arguments can take the Firm’s case any further.   The conduct of the Top Point Parties at the earlier stage of the proceedings may be subject to criticism, but that does not necessarily follow that they also tried to delay the discovery process.  In fact, the Top Point Parties readily agreed for the court to grant the Unless Order without a history of repeated non-compliance with court orders.  Further, they have in general been cooperative in disclosure.  Substantial discovery has been made at least in respect of 4 out of 5 classes of documents requested by the Firm.  Although the Top Point Parties could have been more forthcoming with the disclosure of the Liu’s Emails, one cannot wholly dismiss their argument that such emails do not fall within the ambit of Class 2 Documents.  Neither can the court conclude that they had failed to take reasonable steps to locate the Class 2 Documents.

48.  For the above reasons, I do not find that the filing of the 2^nd Supplemental List was made in bad faith or illusory.  Although such List did not contain the Liu’s Emails, I have no reason to reject Yang’s explanation as to why the 2^nd Supplemental List did not contain GAL’s communications.  I therefore find that there was compliance with the Unless Order.  If the Firm takes the view that there may be further communications between other related parties with SFC, it has liberty to apply to the court for a further list relating to these documents.

(iii) Relief from sanction

49.  In case that I am wrong on the issue of compliance, this is also an appropriate case for the court to exercise discretion to grant relief from sanction.

50.  In Daimler v Leiduck[16], Fok JA (as he then was) had emphasised that striking-out is a remedy of last resort, such that in appropriate cases the court may grant relief from sanction against the automatic consequences of an unless order despite that there being no application for relief from sanction.  Delay can be compensated in costs and deficiency in the provision of documents or answers can be addressed by the court requiring the defaulting party to provide further documents and answers. The use of such kind of alternative is not contrary to the spirit of the CJR, and the court is encouraged to consider other measures that may be more appropriate to be taken.  Fok JA had also emphasised that the primary aim of the court in exercising its powers is to ensure the just resolution of disputes in accordance with the substantive rights of the parties.[17]  A weighty factor in the weighting exercise to be undertaken by the court is the question of proportionality of the sanction in the circumstances of the case.[18]

51.  In Daimler, the defendants’ application for leave to appeal to the Court of Final Appeal was refused.  Fok JA once again made it clear that there is a wide discretion to grant relief from sanction even where the relevant breach is all along denied by the party in breach and no application has been made for relief.[19]

52.  In my judgment, the following factors weight in favour of the granting of the relief.

53.  First, as mentioned above, the Top Point Parties have made serious effort to comply with the Unless Order.  At least substantial disclosure has been made of other important classes of documents such as Class 1 of the Discovery Summons, which Mr Tso Shiu Kei (“Tso”), a solicitor of Robertsons, recognised as a “central plank” of the discovery application[20] and as one of the “central pillars” of the Firm’s case against the Top Point Parties[21].  Therefore, any non-compliance with the Unless Order was unlikely to be contumelious or an intentional flouting of the Unless Order.

54.  Second, the Top Point Parties had indicated at the call-over hearing that they had no objection for the Firm to approach the SFC for the purpose of obtaining the Class 2 Documents.  This might not amount to proper compliance with the Unless Order, but at least it shows that the Top Point Parties had no intention to conceal the Class 2 Documents from the Firm.

55.  Third, assuming that the Liu’s Emails do fall within the ambit of Class 2 Documents, there has been compliance with the Unless Order even though the compliance was late.  A fair trial can still proceed and there is no prejudice to the Firm apart from costs.  Further, the filing of the 3^rd Supplemental List shows that the Top Point Parties were nonetheless willing to comply with the order for discovery.  The disclosure of Liu’s Emails would certainly lead to complaint by the Firm and yet the Top Point Parties did not make any attempt to conceal such documents from the Firm.

56.  Fourth, the Unless Order was not imposed as a penalty for the Top Point Parties’ persistent failure to comply with court orders.  Whilst the Firm complains of belated disclosure, the fact remains that the only discovery order that had been made against the Top Point Parties was the Unless Order, and even that order was made by consent in return for the withdrawal of the Discovery Summons with no order as to costs.  Although this does not amount to a good reason to justify the non-compliance of the Unless Order, it remains a favourable factor for the court to exercise the discretion to grant relief in the present case.

57.  In contrast, striking out the claim in the Main Action and the defence in the Counterclaim would be very draconian, effectively disallowing the Top Point Parties from having their day in court, in particular, where strong allegations of fraud, dishonesty, sham and conspiracy are made against them.  I agree with Mr Maurellet (before his admission to the inner bar), counsel for the Top Point Parties, that this would be a most disproportionate penalty.  It is not in the interest of the administration of justice that serious findings go by way of default against a party.[22]

58.  I also do not accept that the granting of the relief would offend the spirit of the CJR.  After all, the court is concerned with the proper administration of justice and so the court should weight all the factors in determining whether to grant the relief.  Further, I do not accept that the conduct of the Top Point Parties was so faulty to the extent that their case should not be heard by the court.  Hence, if necessary, I would also grant relief from sanction and refuse to strike out the Top Point Parties’ claim in the Main action or to enter judgment against them on the Counterclaim.

THE TOP POINT PARTYS’ SUMMONS

59.  I then turn to the Top Point Parties’ Summons. As compared with the Firm’s Summons, the Top Point Parties have a much weaker case to ask the court to strike out the Firm’s Defence and Counterclaim.

60.  The Top Point Parties took out a summons for specific discovery on 19 January 2015.  After a contested hearing, Master M Wong made the Discovery Order on 14 July 2015 for the Firm to file and serve an affidavit stating whether it had in its possession 3 classes of documents, including:

“1. All books and accounts including ledgers, cash book and reconciliation statement in respect of RIM China Company Limited (”RIM”) under or related to [the Firm’s] file reference under its file reference number 4045645-00002 (“Reference 404”) required to be kept under the Solicitors’ Account Rules Cap. 159F, insofar as relating to the payment requisitions, authorization letters signed or purportedly signed on behalf of RIM and bank transfer or other remittance records disclosed in items 431 to 565 of [the Firm’s] List of Documents filed on 24 February 2014, for or covering the period from 23 May 2011 to 11 June 2011.

  ... ... ...

3. Statements and records of interviews made by [the Firm’s] partners and staff to the Commercial Crime Bureau in relation to Aggarwal’s fraudulent activities as uncovered in June 2011 which refer to Geminis Greater China Fund I Segregated Portfolio and/or Capital Cosmos Financial Limited (with appropriate redaction in respect of any irrelevant matters).”

61.  On 25 August 2015, the Firm filed Tso’s 16^th Affidavit and the 2^nd Supplemental List of Documents in purported compliance with the Discovery Order.  However, the Top Point Parties complain that: (i) the Firm has not disclosed any document named as a “cash book” as required in §1 of the schedule; and (ii) the Firm has not disclosed any statements or records of interview with the Commercial Crime Bureau (“CCB”) apart from one witness statement of Mr David KY Tang dated 7 June 2012 (“Tang’s Statement”).  Furthermore, the copies of the bank reconciliation statements provided by the Firm are heavily redacted.  As a result, the Top Point Parties allege that the Firm has breached the Discovery Order which warrants the striking out of the Defence and Counterclaim.

(i) Cash book

62.  For the cash book, the Firm claims that it has made full discovery.[23] On the other hand, the Top Point Parties argue at length that what the Firm disclosed was not cash book in accordance with the requirements of the Solicitors Accounts Rules, Cap 159F (“SAR”).

63.  In support of the application, the Top Point Parties seek to rely on the expert opinion of Mr Colin Cohen who is a solicitor with considerable experience.  He is of the view that the SAR require proper cash book to be kept by solicitors.  They also have to prepare a reconciliation statement from time to time to show any difference between the balance in the cash book and the balance in the bank account.  Mr Cohen is of the view that none of the documents disclosed resemble a cash book.  Without the disclosure of a cash book, it would be impossible to confirm whether the reconciliation statements have been properly prepared and whether there have been breaches of the SAR.

64.  I do not find it necessary to go into the arguments in details, save as to say that the parties have a genuine dispute as to what was required by the SAR.

65.  In Realkredit v York Montague[24], a case cited by Mr Maurellet himself to oppose the Firm’s Summons, Tuckley LJ held that where an unless order is made in the context of a specific discovery application, if the deponent says that there are no documents in the class specified, that is conclusive, however incredible that may be.[25]

66.  Since the Firm has made a clear and unequivocal confirmation that it has disclosed its cash book, the court, at least at this stage, has to accept the answer as conclusive.  The court should not carry out a detailed investigation as to what were the requirements of the SAR and what books should be kept by the Firm.  Obviously, the Top Point Parties can administer interrogatories, for example by asking the Firm to account for the preparation of the statements, or simply ask the court to draw adverse inference against the Firm by reason of the absence of proper cash book.  The court cannot assume that there are other undisclosed documents.  In any event, in line with the approach adopted in cases such as Lau Chi Wang v Ip Fook Chuen[26]and Daimler AG v Leiduck[27], this court should not strike out the Defence and Counterclaim as the parties had a genuine conflict of opinion on such issue.

(ii) Redactions in reconciliation statements

67.  The Top Point Parties complain about the heavy redactions in the reconciliation statements.  According to them, one of the main purposes of disclosing the reconciliation statements is to put the Top Point Parties in a position to prove the negligence on the part of the Firm in relation to the keeping of its accounts, especially in reconciling its statements. The Top Point Parties claim that the Firm had breached its duty of care in, inter alia, failing to detect unauthorised withdrawals from its client accounts, failing to properly supervise its client accounts and failing to implement accounting control, for example under the SAR, and failing to correct the position despite being required to make reconciliation of its client accounts. It is also pleaded in defence to the Counterclaim that any loss and damage suffered by the Firm was caused by its own negligence for its failure to put in place adequate internal control.

68.  The Top Point Parties claim that another purpose of the reconciliation is to trace the escrow sums paid by the Top Point Parties to the Firm’s client account on the basis that those sums are held on trust. Since the escrow sums had been mixed with the other funds in the client’s account, all the entries in the reconciliation statements would be relevant to ascertain whether the escrow sums had been exhausted according to the rules of equitable tracing.  In such case, there should be no redaction in the statements, at least up to the entry where the escrow sums can safely be said to be exhausted in the mixed funds.

69.  Finally, the Top Point Parties argue that the extensive redaction has made it impossible for anyone to assess whether the relevant provisions in the SAR have been complied with or to conduct a sensible audit.

70.  The Discovery Order actually allows for “appropriate redaction in respect of any irrelevant matters”.

71.  I have been assigned as the docket judge to hear all the cases against the Firm relating to the claims for the loss of the various “escrow sums”.  It has all along been the Firm’s position that only the movements of the subject escrow funds deposited by the particular claimant in the client account are relevant to the related dispute in a particular case. In other words, the movements of other “escrow funds” belonging to other clients or parties are not relevant to the particular case in issue, and so the Top Point Parties, and indeed all the other third parties making similar claims against the Firm for the loss of the “escrow funds”, are not entitled to all the Firm’s bank and reconciliation statements without redaction in order to conduct an “audit” of the Firm.

72.  In my judgment, the concern of the Firm is a legitimate one.  It is still unclear as to how the Top Point Parties are going to rely on the movements of the other escrow funds in establishing negligence on the part of the Firm.  If the Top Point Parties are relying on the breach of duty owed by the Firm to other parties in establishing negligence against the Firm in this particular claim, then the court would possibly have to deal all the claims for the loss of escrow funds in one single action.  If that is the case, does it mean that all the cases against the Firm will have to be heard together?  Does it mean that the Firm would have to justify in this particular action as to why it was not negligent in dealing with each and every escrow fund paid into the client account by other third party?

73.  The court is not provided with the details of the arguments before Master M Wong, and so I do not propose to make a final determination as to whether the movements of other “escrow sums” are relevant for the purpose of the present claim.  The matter should be left for further argument in the future.  At this stage, it would be suffice for me to say that, due to the fact that there is a genuine dispute between the parties as to the appropriateness of the redactions, the court should not strike out the Firm’s Defence and Counterclaim simply because the Firm takes a particular stance about such issue.  If the Top Point Parties are not satisfied with the redactions, they should take out a further application for the court to determine whether the redactions are appropriate in the circumstances.

(iii) CCB statements

74.  The Discovery Order specifies that the Firm is to disclose statements and records of interviews made by the Firm’s partners and staff to the CCB in relation to Aggarwal’s fraudulent activities which refer to Geminis Fund and Capital Cosmos.

75.  The Firm has disclosed the redacted Tang’s Statement, and the Firm has also confirmed that it has disclosed all the statements within this category.[28] Further, Tso explains that Robertsons had taken the “prudent and responsible step” to ask the CCB to provide the statements and interviews records.  However, the CCB replied stating that the documents had been destroyed after Aggarwal’s conviction.

76.  The Top Point Parties complain that this is not sufficient.  In light of the sheer magnitude of Aggarwal’s fraud, it would be hard to believe that there was only one record or statement made by the Firm’s partners or staff.  By relying on the CCB’s reply, the Firm seems to accept that there had been documents in the possession of the Firm but they cannot now be located.  In such circumstances, the Firm is required by the Discovery Order to reveal what has become of the documents that used to be in its possession, custody or power.

77.  I do not accept that there is any substance in such complaint.  Even if the partners and staff of the Firm had given statements to the police, that does not automatically mean that copies of these statements had been supplied to the Firm before.  So far as the Firm is concerned, it has already filed an affidavit to confirm that full discovery has been made for such class of documents.  This would be sufficient as far as the compliance of the Discovery Order is concerned.  As mentioned above[29], if the deponent says that there are no documents in the class specified, that is conclusive however incredible that may be.

78.  For the above reasons, I dismiss both the Firm’s Summons and the Top Point Parties’ Summons.  The parties are at liberty to make further applications for discovery and interrogatories resulting from these Decisions. 

79.  I also make a costs order nisi that:

(i) the costs of the Firm’s Summons be costs in the cause with certificate for 2 counsel;

(ii) the costs of the Top Point Parties’ Summons be to the Firm with certificate for 2 counsel.

80.  The costs order nisi shall be made absolute 14 days after the date of the handing down of these Decisions.

(David Lok) Judge of the Court of First Instance High Court

Mr Jose Antonio Maurellet and Mr Jason Yu, instructed by Tse Yuen Ting Wong, for Plaintiff in the Main Action and the Defendants in the Counterclaim

Mr Charles Sussex SC and Ms Frances Lok, instructed by Robertsons, for the Defendant in the Main Action and the Plaintiff in the Counterclaim

HCA 1088/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 1088 OF 2011

____________

BETWEEN

	TOP POINT LIMITED	Plaintiff
	and
	K&L GATES (A FIRM OF SOLICITORS)	Defendant (Respondent)

(by Main Action)

AND BETWEEN

	K&L GATES (A FIRM OF SOLICITORS)	Plaintiff (Respondent)
	and
	GEMINIS FUNDS SPC	1st Defendant (Applicant)
	CAPITAL COSMOS FINANCIAL LIMITED	2nd Defendant
	EVENSTAR MASTER FUND SPC	3rd Defendant (Applicant)
	GEMINIS FINANCE LIMITED	4th Defendant (Applicant)
	GEMINIS CAPITAL INTERNATIONAL LIMITED	5th Defendant
	COSMOS MEDIA INVESTMENTS LIMITED	6th Defendant (Applicant)
	GENPOINT INTERNATIONAL LIMITED	7th Defendant (Applicant)
	JAMES TING-YEH YANG	8th Defendant

(by Counterclaim)

____________

Before: Deputy High Court Judge Seagroatt in Chambers

Date of Hearing: 25 November 2013

Date of Decision: 25 November 2013

Date of Reasons for Decision: 28 November 2013

_____________________________

REASONS FOR DECISION

_____________________________

 

1. This is an appeal against the decision of Master J Wong dated the 24 July 2013 whereby he dismissed the application of five of the defendants to the Counterclaim in the above action to set aside the service of the Defence and Counterclaim upon them, and the order of Master Au-Yeung giving leave for the service out of the jurisdiction.

2. The five defendants concerned (there are eight in all) are offshore companies.  However a short consideration of all the defendants, and the plaintiff in the main action reveals the background to what I regard as an entirely unmeritorious appeal based on a pettyfogging technicality which had already been corrected.

3. K&L Gates is a firm of solicitors.  It was, as it transpired, unfortunate to have, as one of its partners, a solicitor by the name of Navin Aggarwal.  Following the discovery that Mr Aggarwal had misappropriated clients’ monies occasioning considerable losses for the firm, Aggarwal resigned from the firm in June 2011 and was taken into custody on criminal charges arising therefrom, where he still is. 

4. Apart from the taking of clients’ monies Aggarwal is alleged to be involved in the creation and management of some “escrow” accounts in which monies had been deposited by or on behalf of non-clients of the firm.  Very large sums of money are involved and sums of money, allegedly representing “fees”, have been paid out to the holders of those accounts between January 2009 and May 2011.

5. Gates have to date found 51 such accounts, and 233 transactions relating to them.  More than 88 million HKD in “fees” and “interest” have been paid out to the holders of those accounts, being approximately 55 million HKD more than had been paid into those accounts. 

6. Proceedings were begun by Top Point on 29 June 2011 against Gates, claiming to be the assignee of Geminis Funds and Capital Cosmos and entitled to the sums deposited in the “escrow” accounts by those companies.  All three companies are owned and/or controlled by a Mr James Yang. 

7. It appears that a number of other entities have taken proceedings against Gates on essentially the same basis. 

8. In its turn Gates has taken proceedings against Aggarwal and obtained world-wide Mareva injunctions against him. 

9. Top Point tried to obtain an early judgment against Gates by proceeding under Order 14.  That came before Deputy High Court Judge L Chan on 6 December 2011.  He gave Gates unconditional leave to defend. He took the view – as do I – that the “escrow” accounts appear to be a sham. 

10. Gates have counterclaimed against seven companies and James Yang who is the plaintiff’s controlling shareholder.  The 1^st and 2^nd defendants are the very companies whose assignment to the plaintiff of their claims forms the basis of the claim against Gates.  Both those companies are controlled/owned by James Yang, the 8^th defendant, who had admitted that he owns and controls all of the seven corporate defendants to the counterclaim.  There had been a serious omission from Top Point’s Statement of Claim against Gates in its failure to disclose that James Yang’s companies had been signing “escrow” agreements with Aggarwal or receiving payments under them up to the time of Aggarwal’s arrest and resignation. 

11. Whilst the 5^th defendant is a Hong Kong registered company all the other companies owned by Yang are offshore companies.  The solicitors for Top Point, Geminis Capital (5^th defendant) and James Yang (8^th defendant) are Messrs Tse Yuen Ting Wong. 

12. The solicitors for Gates understandably wrote to Top Point’s solicitors asking if they would accept service of the counterclaim on behalf of the remaining defendants – i.e. their client Yang’s six companies.  Their response was a not very sensible refusal. 

13. Acknowledging that they were now being faced with deliberate delay and lack of reasonable cooperation, Gates’ solicitors, Messrs Robertsons now had to apply to the court for leave to serve those defendants out of the jurisdiction under Order 11. 

14. Initially a Master said leave was not required but Robertsons pursued the point although in fact effecting service on those defendants outside the jurisdiction by registered post. 

15. In the meantime Top Point’s solicitors sought an extension of time for Yang (8^th defendant) and the 5^th defendant to serve their Defence to the counterclaim.  They then refused to accept that the other defendants (for whom they purported not to act) had been served and insisted that leave was required under Order 11. 

16. Robertsons then made an application for leave to serve the counterclaim against the relevant defendants out of the jurisdiction.  It was heard by Master Au-Yeung (as she then was) who made the requisite order but the time limit for the acknowledgement of service was not specified. 

17. Nonetheless it was served on the 18 December 2012 on these defendants with the solicitors for Gates taking the precaution of adding the 28 day time limit in their letter (see Order 11 rule 4/1G – page 170 – Hong Kong Civil Procedure 2013 – Vol 1).  On the 3 January 2013 Top Point’s solicitors filed acknowledgement of service for the 1^st, 3^rd, 6^th and 7^th defendants and a few days later for the 4^th defendant. 

18. But, shortly thereafter, Top Point’s solicitors wrote again, this time to say they had no instruction to accept service.  On 25 January 2013 they wrote again, this time to say that they act for all defendants but complain that no copy order accompanied the counterclaim.  [The letter accompanying the documents served clearly enough referred to a copy order being enclosed.]  On the 4 February 2013 the solicitors took out a summons to set aside the service.  That was heard by Master J Wong who dismissed the application. 

19. I made it clear on the hearing of this appeal that I regarded it as a waste of time and cost, entirely without merit, a cynical delaying tactic of the worst kind, an unacceptable abuse of the court process and a pointless attempt to circumvent the rationale and spirit of the Civil Justice Review. 

20. I have had the benefit of reading the notes of the learned Master and the transcript of his decision.  I wholly and respectfully concur with his decision and reasoning and can do no better than quote directly from his decision: 

“Upon consideration of all the evidence, authorities and submissions before me, I have decided to dismiss the application and go further to clarify the parties’ disputes by positive declarations to avoid any unnecessary uncertainties so that they could move forward in the usual track. My reasons appear below:

First I remind myself of the underlying objectives of Civil Justice Reform, including, in particular, to increase the cost-effectiveness of any practice and procedure. A case is to be dealt with as expeditiously as is reasonably practicable and to promote a sense of reasonable proportion and procedural economy in the conduct of proceedings.

Second, applying the above principles into the present dispute, on a broad view, the applicants are taking technical and procedural points, bearing no substance or real prejudice to their case. As a matter of evidence, there is no dispute that all the applicants are offshore companies owned and controlled by Mr Yang, the 8^th defendant herein by counterclaim.

By insisting K&L go through the process of applying for leave to serve the counterclaim out of the jurisdiction instead of accepting service of the same by the same firm of solicitors locally, it must be a factor to be taken into account.

Third, both learned counsel have taken me to go through how the November and December services were performed. The November service is clearly not effective and cannot be relied upon. The December service is irregular by failure to include the usual 28 days’ time limit for the acknowledgment of service to be filed. However, such irregularity, albeit mandatory, does not and will not affect any substantive right of the applicants at all.

Fourth and finally, no doubt it is a piece of hotly contested litigation involving a substantial amount of money and multi parties. To avoid any future complication regarding service of the amended defence and counterclaim, I take the view that a simple dismissal of the summons may not be good enough. So in the circumstances, I will be making two declarations in the following:

The service of the amended defence and counterclaim upon the applicants by K&L, by letter of 2 November 2012, are not effective.

The service of the amended defence and counterclaim upon the applicants by K&L, by letters of 18 December 2012, are effective, notwithstanding that the order of Master Au Yeung dated 7 December 2012 does not contain the time limit within which the applicants must acknowledge service.”

21. The appeal is dismissed.

22. As far as the filing and service of the Defence is concerned, that will be done within 7 days from the date of my decision ie 25 November 2013 without prejudice to the application of the defendants to challenge jurisdiction, to be heard on the 27 January 2014.  They have had almost one year already. 

23. The defendants to the counterclaim will pay the costs of K&L Gates’ solicitors to be taxed if not agreed, forthwith, on an indemnity basis.  I have had regard to the matters set out in Order 62/App/12 – “when to order indemnity costs”. 

	(Conrad Seagroatt)
	Deputy High Court Judge

Ms Frances Lok, instructed by Robertsons, for the plaintiff (by counterclaim)

Mr Jin Pao, instructed by Tse Yuen Ting Wong, for the 1^st, 3^rd, 4^th, 6^th and 7^th defendants (by counterclaim)

HCA 1088/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1088 OF 2011

____________

BETWEEN

	TOP POINT LIMITED	Plaintiff
and
	K&L GATES (a firm of solicitors)	Defendants

____________

Before: Deputy High Court Judge L. Chan in Chambers

Dates of Filing Written Submissions: 30 December 2011 and 13, 20 January 2012

Date of Decision: 30 January 2012

____________

D E C I S I O N

____________

 

1.  The plaintiff applied for summary judgment. The claim is for US$4.5 million with interest. I decided on 8 December 2011 that the defendant should have unconditional leave to defend the claim. I made a costs order nisi that the costs of the application be in the cause. My reason for this order was that the defendant’s arguments in defence only came out in the defence affidavits.

2.  The defendant has applied to vary the costs order nisi.  It seeks an order that the costs of the application be in the cause up to and including 16 September 2011 and the costs thereafter including those for the hearing on 6 December 2011 be paid by the plaintiff to the defendant forthwith.  Alternatively, the date for the costs to be in the cause can be extended up to and including 21 November 2011 and the costs thereafter be paid by the plaintiff to the defendant forthwith.

3.  The defendant’s reason for the first proposed order is that the defendant had filed two affidavits in opposition by 9 September.  Seven days thereafter should be enough for the plaintiff to digest the defendant’s case and appreciate that the defendant had an arguable defence.  The plaintiff should therefore stop proceeding with the application for summary judgment from 16 September onwards.  However, the plaintiff, after being aware of the defendant’s grounds of defence, continued with the application which it did not win.  The plaintiff should therefore pay the defendant the costs of the application after 16 September 2011.

4.  If the first proposed order should not be accepted by the court, the defendant proposed to extend the period for costs in the cause up to 21 November.  The reason being that the defendant had filed two more affidavits on 7 November which revealed further grounds of defence.

5.  On 21 November, the defendant’s solicitors further wrote to the plaintiff’s solicitors saying:

“There can be no doubt that there are a number of triable issues arising from the parties’ respective Affidavits and Affirmations. It is respectfully clear that this Action is not suitable for summary determination. We consider that your client knew or ought to have known (and been advised) from the outset that this Action was not at all suitable for summary determination. Indeed, the Firm raised this issue in Mr Tso’s 2nd Affidavit on 4 August 2011.

We invite you to withdraw the O14 summons (the ‘summons’) and vacate the hearing on 7 December 2011, with directions to be agreed between us for the further conduct of this Action. We are willing to consider any sensible and reasonable proposal in terms of costs of the summons, notwithstanding the fact that prima facie we are entitled to seek costs of and occasioned by the summons from your client.

Please revert to us within the next 7 days to confirm your agreement to withdraw the summons, failing which we shall brief Counsel to attend the hearing on 7 December 2011 and as and when the summons is dismissed, we shall place this letter before the Court and seek costs above the party and party scale against your client.”

6.  The plaintiff disagreed and continued with the application.

7.  In applying to vary the costs order nisi, the defendant also relies on the duty of the parties in O.1A r.3 of the Rules of the High Court to assist the court to further the underlying objectives of the rules.

8.  I think the alternative proposed order appears to be reasonable as the two affidavits filed on 7 November contain material evidence which I have taken into account in arriving at my decision of 8 December 2011 (see paras 27, 40-41 and 55-56 of my decision).  The letter from the defendant’s solicitors dated 21 November was also a clear and timely invitation to the plaintiff to consider whether it should still push ahead with the application.

9.  The plaintiff opposes this application to vary the costs order nisi.

10.  The first argument is that I did not dismiss the plaintiff’s application for summary judgment.  The defendant therefore cannot rely on O.14 r.7(1) of the Rules of the High Court to seek costs against the plaintiff.  That argument is no doubt correct.  However, the defendant is not relying on O.14 r.7(1) to seek costs for the whole application.  It merely says that the plaintiff should pay costs from after 21 November as it was unreasonable for it to have pushed on with the application after receiving the letter of 21 November.  Hence, I do not accept the plaintiff’s first argument.

11.  The plaintiff then argues that the costs order nisi I made is the usual order to accompany unconditional leave to defend.  That is also correct on the basis of the matters known to me as at 8 December.  However, I now understand that there was the invitation not to proceed further in the letter of the defendant’s solicitors dated 21 November.  I would go further and say that the plaintiff should have reconsidered the merits of its application after receiving the further affidavits on 7 November even without the defendant’s invitation to do so.  The second argument therefore has no merit.

12.  The third argument of the plaintiff is that the defendant’s affidavits filed up to 9 September were insufficient to defeat the application for summary judgment.  That is correct.  I have already indicated that it is the alternative proposed order that I find reasonable.

13.  The plaintiff’s fourth argument is that the letter dated 21 November from the defendant’s solicitors did not contain any offer and was not a Calderbank offer.  Hence, the plaintiff was not required to beat any offer and should not be ordered to pay costs for failing to beat any.  However, I take the view that this letter was a clear and timely invitation to the plaintiff to consider a reasonable way to dispose of the application.  It was to open a dialogue for such purpose.  If the plaintiff should have adopted a reasonable attitude, this letter would have resulted in the withdrawal of the application with costs be in the cause.  But the plaintiff did not respond in a reasonable manner.  It counter-proposed payment of security by the defendant in return for leave to defend.  That however was not my decision.

14.  The plaintiff’s final argument is that the application for summary judgment had not been dismissed and it was not unreasonable for the plaintiff to pursue the application after 21 November. This was particularly so when the defendant had made no offer of costs.  Hence, the plaintiff had not breached its duties under O.1A r.3.

15.  I think this is a repetition of the second and fourth arguments put together and I disagree with it.

16.  In the premises, I do vary the costs order nisi. I order that the costs of the plaintiff’s application for summary judgment up to and including 21 November 2011 be in the cause and such costs thereafter and including the hearing on 6 December 2011 and this application to vary be paid by the plaintiff to the defendant forthwith.  I also certify the matter fit for leading and junior counsel.  The amount of costs to be paid forthwith is to be assessed summarily by me at a 9.30 hearing to be fixed by the parties unless the parties can agree on such amount.

(L. Chan) Deputy High Court Judge

Messrs Tse Yuen Ting Wong, for the Plaintiff

Mr Charles Sussex, SC, instructed by Messrs Robertsons, for the Defendant

HCA 1088/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1088 OF 2011

____________

BETWEEN

	TOP POINT LIMITED	Plaintiff
and
	K&L GATES	Defendant
	(A firm of solicitors)

____________

Before: Deputy High Court Judge L. Chan in Chambers

Date of Hearing: 6 December 2011

Date of Decision: 8 December 2011

____________

D E C I S I O N

____________

 

1.  This is an application by the plaintiff for summary judgment.

The case as pleaded in the statement of claim

2.  A Geminis Funds SPC (“Geminis Funds”), on behalf of Geminis Greater China Fund I Segregated Portfolio, purportedly entered into an agreement with the defendant and dated 20 May 2011 to deposit US$1 million into the defendant’s client account.  This agreement is hereinafter called the Geminis Escrow Agreement.  Its relevant terms are:

“This is to appoint K&L Gates as our escrow agent. We will deposit up to US$1 million (“Escrow Sum”) into your firm’s client account in our name with a licensed bank in Hong Kong after signing this letter, and your firm will release the Escrow Sum (or any part of) as per our written instruction to be given from time to time provided that:

1. Upon receipt of a written notice of transfer of the whole or any part of the Escrow Sum from us, you shall within 1 business day effect such transfer, comply with the instructions contained in such notice and provide a copy of the bank remittance advice on the day such transfer is made.

2. K&L Gates undertakes and agrees that, throughout the continuation of this appointment as our escrow agent, it shall:

(a) subject to paragraph 1 of this agreement, not (nor shall it have or be deemed to have any power or authority to) dispose of, deliver, release or otherwise deal with the Escrow Sum or any interest therein;

(b) take all steps which may be necessary or expedient to preserve or protect our interests in the Escrow Sum; and

(c) not do or cause or permit to be done by any other person anything which may in any way depreciate, jeopardise or otherwise prejudice the value of the Escrow Sum.

…

6. K&L Gates hereby represents and warrants that it has full capacity and authority to accept this appointment and to carry out all the performance of duties contemplated herein and has taken all action (including the obtaining of all necessary governmental consents) to authorise the execution, delivery and performance of the appointment.

…”

The agreement was signed by one Navin Aggarwal, a former partner of the defendant, on behalf of the defendant.

3.  Geminis Funds purportedly pursuant to this agreement deposited US$1 million into the defendant’s client account on 23 May 2011. 

4.  A Capital Cosmos Financial Limited (“Capital Cosmos”) purportedly entered into another agreement with the defendant dated 31 May 2011 to deposit the sum of US$3.5 million into the defendant’s client account.  This agreement is hereinafter called the “Capital Escrow Agreement”.  The terms of this agreement, save the identity of the depositor, the date and the amount to be deposited, are the same as those in the Geminis Escrow Agreement.

5.  Capital Cosmos purportedly pursuant to this agreement deposited US$3.5 million into the defendant’s client account on 31 May 2011. 

6.  Both Geminis Funds and Capital Cosmos served recall notices dated 14 June 2011 on the defendant requiring the defendant to transfer the US$1 million and US$3.5 million respectively to their designated accounts.  The defendant did not comply with the recall notices.  Each of Geminis Funds and Capital Cosmos then executed a Deed of Assignment dated 27 June 2011 assigning all their rights under the two Escrow Agreements unto the plaintiff. 

7.  The plaintiff then instituted this action against the defendant for the repayment of the US$1 million and US$3.5 million with damages and interest.  The plaintiff now seeks final judgment under Order 14 for US$4.5 million with interest. 

8.  The first affirmation by Mr James Yang, the plaintiff’s director, basically verified the contents of the statement of claim.

The Defendant’s Case

9.  The defendant’s evidence unfolds a complicated picture.  The defendant’s case is presented by the affidavits of a partner, Mr Vincent Tso.  Mr Tso said in his 2nd affidavit that Mr Aggarwal had been arrested by the police officers of the Commercial Crime Bureau on 9 June 2011. He was charged on 24 June 2011 with three counts of theft of money held by the Hong Kong Bank for the defendant and three counts of forgery.  The defendant then engaged a team of forensic accountants to investigate the receipts and disbursements of funds said to have been paid into the defendant’s client account. 

10.  The defendant then instituted HCA1061 of 2011 against Aggarwal and obtained a worldwide injunction against him.  There were then 13 High Court actions brought by various parties against the defendant. Some of these parties said that they had provided “escrow” monies to the defendant under the auspices of Aggarwal.  The defendant suspects that some of these parties might have been involved in, and complicit with Aggarwal’s fraudulent conduct. 

11.  The defendant’s investigations also revealed that the plaintiff’s director, Mr James Yang, appeared to be a responsible officer of a number of corporations licensed by the Securities and Futures Commission.  These corporations are featured in the websites of two groups of companies called the Geminis Group and Evenstar Group.

12.  Two companies called Evenstar Master Fund SPC and Evenstar Capital Management Limited were the defendant’s clients, which had been billed by the defendant for work done between February 2008 and May 2011. However, there was no record of any billing for any work done for any escrow agreement as pleaded in the statement of claim that involved any Geminis, Cosmos or Evenstar entity. 

13.  There was also no one in the defendant’s partnership, apart from Aggarwal, who was aware of what had become of the monies deposited by Geminis Funds and Capital Cosmos into the defendant’s client account or of Aggarwal’s fraudulent activities. 

14.  The defendant also found some emails exchanged between Aggarwal and some people named in the websites of Geminis and Evenstar groups.  These emails appear to relate to the same type of escrow agreements as referred to in the statement of claim. 

15.  One set of emails exchanged between 20 November 2009 and 28 January 2010 related to an escrow fund of US$5 million (Exhibit TSKV-6).  The fund was offered by one Alan Chen of the Evenstar Capital Group. It was offered for one week and had to be returned on 30 November 2009.  There was a fee at US$80,000 payable to the depositor for the deposit of this fund for this week.  The fee was equivalent to interest at 83 per cent per annum on US$5 million. 

16.  The records of the defendant (Exhibit TSKV-16) show that this fund was deposited into the defendant’s client account on 23 November 2009.  The emails show that this fund was not repaid on 30 November 2009 but the period of deposit was extended to 4 December 2009 in consideration of another fee of US$100,000.  The fee of US$100,000 for four days was equivalent to interest at 182 per cent per annum on US$5 million.  The total fees of US$180,000 were transferred out of the defendant’s client account to an account of Evenstar Master Sub Fund I Segregated Portfolio on 30 November 2009. 

17.  The fund was again not repaid on 4 December. The emails show that there was a second extension of the deposit period from 7 December to 11 December.  The fee payable for this extension was also US$100,000 and was transferred from the defendant’s client account to the same account of Evenstar Master Sub Fund I on 7 December 2009. 

18.  There was then a third extension up to 18 January 2010 at the fee of US$180,000.  This fee was paid later date on 21 January 2010. 

19.  There was then a fourth extension lasting until 29 January 2010.  The fee payable for this extension was US$100,000 which was paid on 19 January 2010.  The fund of US$5 million was returned on 29 January 2010. 

20.  A total fee of US$560,000 was paid for the US$5 million to remain in the defendant’s client account from 23 November 2009 to 29 January 2010 or for 67 days.  The annualised rate for US$5 million principal is 61 per cent.  This overall rate is lower because of the much lower fees for the third and fourth extensions.  The overall rate up to the third extension is 113.5 per cent.  

21.  This fund was also deposited into the defendant’s client account purportedly pursuant to an escrow agreement in the same terms as those pleaded in the statement of claim and referred to above. These terms of the escrow agreement however do not provide for payment of any fee or interest.  The fees for the deposit of the escrow sum and extensions of the period of deposit were only mentioned in the emails.

22.  The terms of the escrow agreement also gave the defendant no liberty to use the escrow sum for any purpose whatsoever.  The defendant had to take all steps to protect the depositor’s interest in the escrow sum.  It should not do or permit anyone to do anything which may in any way depreciate, jeopardise or otherwise prejudice the value of the sum. 

23.  There was an instance in May 2010 when an escrow sum of US$5 million was not returned on time.  That attracted a penalty of US$20,000 per day which was equivalent 146 per cent per annum on the US$5 million principal. 

24.  Mr Tso of the defendant also pointed out that there was no counterparty to the so called escrow agreement.  There was also no due diligence undertaken by the depositor on the counterparty.  The depositor just used the defendant’s client account to remit monies in and out and, in the course of which, earning extortionate rates of return far exceeding what could be earned by depositing money in banks.  The defendant was however never in the business of paying fees or interest to anyone who deposited money with it for legitimate purposes, save for bank interest paid by the banks on the deposit. 

25.  It was also not part of the defendant’s ordinary business to provide stand-alone escrow services which are not incidental to the provision of legal service.  Geminis Funds and Capital Cosmos were not the defendant’s clients and no legal services had been provided to them. 

26.  The defendant has, however, discovered a genuine and legitimate deal which began in April/May 2009.  The transaction indeed involved counterparties.  One of Mr Yang’s companies was represented by another firm of lawyers.  The escrow agreement in that transaction involved three parties. 

27.  The defendant’s investigation into Aggarwal’s activities shows that, apart from the two instances of deposit of escrow sums referred to in the statement of claim, there were from January 2009 to June 2011 another 44 such transactions involving Mr Yang’s companies.  The sums paid to these companies exceeded the sums deposited by them to the defendant’s client account by HK$48,327,900.05 (Exhibit TSKV-16).  That means a deficit in the same sum had been created in the defendant’s client account at the end of these 44 transactions.

28.  It is the defendant’s case that the escrow agreements are sham arrangements.  Mr Aggarwal in fact made fraudulent use of these shams to borrow the so-called escrow sums for his own use.  The issue is whether the depositors, or those who control them, were complicit in Aggarwal’s fraud.  The alternative issue is whether these persons should, or ought to have known that these extraordinary arrangements were shams and hence they were not acting bona fide in procuring their companies to deposit the escrow sums into the defendant’s client account and getting the generous fees in return. 

The Plaintiff’s case

29.  Mr Yang made a reply affirmation.  He said that the defendant had, in the past 10 years, provided legal service to many of his companies in the Geminis/Evenstar Group.  He was personally known to Mr Tso who had introduced Aggarwal to him.  He also listed a number of transactions in which the defendant had either represented one of his companies or the counterparty to the transactions.  The counterparty in the legitimate transaction in April 2009 that Mr Tso had identified in his affidavit was one Golden Meditech Holding Limited.

30.  Regarding the deposit of escrow sums into the defendant’s client account pursuant to the so-called escrow agreements, he explained that they were for use as “fund proof”.  He said in his affirmation:

“13. In about January 2009, Mr Aggarwal approached me and represented to me that he had a number of PRC-based clients who were interested in acquiring a substantial stake in Hong Kong listed companies and, for that purpose, required what is commonly referred as “fund proof” to demonstrate that they had readily available funds or ability to arrange funds within Hong Kong to finance the acquisition.

14. Mr Aggarwal said the funds of the PRC clients were tied up in China and could not be remitted to Hong Kong in time for the potential bidding. Mr Aggarwal asked if my companies were interested in putting funds in K&L Gates client accounts in escrow which would enable K&L Gate’s clients to provide fund proof. Mr Aggarwal assured me that the PRC clients were clients of K&L Gates and all the funds provided by my companies would be deposited in K&L Gate’s client accounts and held in escrow, and the funds would only be released with the written consent of my companies. In return, the PRC clients would pay a commitment or arrangement fee to my companies and, if the bidding was successful, my companies might have the option to participate in the proposed acquisition.

15. The “fund proof” is commonly employed by potential bidders who require short-term finance or access to finance when making an offer for acquisition of a substantial stake in a listed company. In simple terms, the provider of the funds will make available funds to enable the potential bidder (normally a special purpose corporate vehicle) to demonstrate that it has the requisite funds or the ability to arrange funds for the purpose of the acquisition. In return, the provider of the funds would receive an arrangement fee for the provision of funds.”

31.  However, there appears to be an internal inconsistency in what Mr Yang said.  He said in paragraph 14 that he had been assured by Aggarwal that all funds would be held in the defendant’s client account and would only be released with the written consent of his companies. But he then said in paragraph 15 that the “fund proof” was short term finance made available to potential bidders to enable them to show the availability of funds or their ability to raise funds for the acquisition of a listed company or a substantial stake therein. 

32.  However, if the funds could not be used for any purpose, as the terms of the so-called escrow agreement would ensure, save with the written consent of the depositor, then they are not available to the potential bidder for any purpose.  It would be a gross misrepresentation for the defendant, or the potential bidder, to tell the potential vendor that such funds were available for use in the acquisition or could indicate the bidder’s ability to raise these funds. 

33.  Mr Yang also admitted that he did not know the identities of these unknown PRC entities.  One would imagine that he would therefore not consent to allow the funds of his companies to be used by these entities.  Before the funds could be used for any purpose of these unknown entities, he would, no doubt, want to know about them and the transactions that they were entering into.  He would also wish to carry out due diligence on these entities and the proposed transactions before he would allow the funds to be used.

34.  In order to boost his case, Mr Yang also referred to the long-standing relationship of his companies with the defendant, Aggarwal being a senior partner with substantial experience in corporate and commercial matters, fund proof was a normal and common arrangement in Hong Kong for substantial acquisitions by PRC based entities, escrow arrangement with a law firm as escrow agent was a normal and common practice, and the defendant was a large and reputable international law firm.  He further said that since he had no direct dealings with, or access to these PRC clients of the defendant, he relied entirely on the escrow arrangements with the defendant to safeguard the funds of his companies.

35.  I would, however, take the view that if his funds were indeed so securely protected, then it would not have been available to any potential bidder for any purpose.  In that case, I cannot understand who would be prepared to pay his companies the very generous fees above-mentioned.

36.  I should also mention that Mr Yang also relied on the fact that there were 44 concluded transactions which took place over 2½ years and involved other staff and partners of the defendant in their processing. 

37.  He also referred to certain mandates of introducer which he said were signed between his companies and the PRC clients of the defendant after the escrow sums had been deposited.  These mandates provided for payments of service fees, commitment fees and success fees by the PRC entities.  He said such fees had been paid by these entities.  But the defendant said that for those mandates of introducer that were purportedly related to these escrow transactions, they were part of the sham and no fee had ever been paid thereunder.  It also said that the so-called PRC entities mentioned in these mandates were Aggarwal’s puppets rather than real potential bidders.

38.  I also note that the payment that leading counsel for the plaintiff submitted as having been made pursuant to a mandate of introducer dated 20 November 2009 (Exhibit TSKV-6 at page 96) was more likely to be the US$80,000 fee paid for the deposit of the US$5 million escrow sum with the defendant from 23 November to 30 November 2009.

39.  Finally, Mr Yang said that his companies were dealing with Aggarwal as a partner of the defendant.  The escrow agreements were signed by Aggarwal as a partner and the escrow sums were paid into the defendant’s client account.

The Defendant’s reply

40.  Mr Tso made a fourth affidavit to deal with the fund proof issue.  He said:

“13. … My experience of fund proof is that, other than fund proof by an offeror in the case of a general offer, which is regulated by the Securities and Futures Commission (“the SFC”) as explained in paragraph 13 (sic) below, money is only required for a specific point in time, not, as appears to be the case between Mr Yang’s “companies” and Mr Aggarwal, over a period of time, repeatedly “rolled over”, with hugely exorbitant fees and interest, including “penalties” payable, with monies being rolled over and over, each time with hugely exorbitant fees and interest being payable over and over. In my experience as a commercial lawyer in Hong Kong, this is not “fund proof” for an acquisition of a substantial stake in a Hong Kong listed company.

14. Proper fund proof in a general offer case is regulated by the SFC under the Code on Takeovers and Mergers and Share Repurchase and would involve an SFC licensed financial adviser giving a statement that financial resources of the offeror are available for a period of time to satisfy its obligations in respect of the offer. Law firms are not in this category. In addition, in such case, funds cannot be recalled at the offeror’s discretion unless and until the general offer is completed and the offeror’s obligations are satisfied. This is obviously not the type of case under each of the so called “escrow agreements” as they all provided for 3 business days notice or shorter for the return of monies to the payor.”

41.  Another partner of the defendant, Mr Michael Chan, also made an affidavit.  He said he was the counter-signatory of some payment documents used for remitting money to Mr Yang’s companies.  He signed those documents by relying on Aggarwal’s bona fides and was not aware that the payments were illegitimate.  He said Agarrwal had defrauded him and the defendant.

The Plaintiff’s reply

42.  Mr Yang made a third affirmation to respond to Mr Tso’s fourth affidavit.  He said there were many types of fund proof including the type that his companies had engaged in.  He said the two escrow agreements in question were binding despite Geminis Funds and Capital Cosmos were not the defendant’s clients.  He also said that he had no need for due diligence on the PRC entities as the defendant was the counter-party and he relied on the defendant’s reputation.  He assumed that the defendant would have conducted due diligence on its clients before involving in the fund proof arrangement. 

43.  However, I would observe that Mr Yang’s confidence in the defendants seemed to be so overwhelming that he did not even bother to know who were these clients of the defendant and what they were intending to do. 

44.  Mr Yang also denied of any knowledge or involvement in Aggarwal’s fraud. 

The Plaintiff’s submissions

45.  Leading counsel for the plaintiff submitted that Aggarwal’s fraud had nothing to do with the plaintiff, Geminis Funds or Capital Cosmos.  The fraud is thus irrelevant to the plaintiff’s claim. 

46.  Counsel also relied on section 7 of the Partnership Ordinance, Cap. 38 which provides:

“7. Every partner is an agent of the firm and his other partners for the purpose of the business of the partnership; and the acts of every partner who does any act for carrying on in the usual way business of the kind carried on by the firm of which he is a member bind the firm and his partners, unless the partner so acting has in fact no authority to act for the firm in the particular matter, and the person with whom he is dealing either knows that he has no authority or does not know or believe him to be a partner.”

47.  Counsel submitted that Aggarwal was acting as an agent of the defendant firm and the escrow sums were paid into the defendant’s client account. 

48.  Counsel also referred to the 44 completed escrow arrangements and submitted that they were irrelevant in that they were made between the defendant and companies that were independent legal personalities. However, counsel also relied on the fact that these transactions were done in the open, spanning across 2½ years and involved many people in their processing. 

49.  Counsel also relied on section 12 of the Partnership Ordinance which provides:

“12. Where, by any wrongful act or omission of any partner acting in the ordinary course of the business of the firm or with the authority of its co-partners, loss or injury is caused to any person not being a partner in the firm, or any penalty is incurred, the firm is liable therefor to the same extent as the partner so acting or omitting to act.”

50.  Finally, counsel relied on money had and received by the defendant to the use of Geminis Funds and Capital Cosmos which ground has not even been pleaded in the statement of claim. 

Analysis and Decision

51.  I disagree with the submissions of leading counsel for the plaintiff.  For the purpose of this application, I think whether Mr Yang’s companies had been involved with Aggarwal’s fraud is an issue to be canvassed at the trial.  This has been pointed out by Mr Tso in his affidavits. 

52.  At this stage, and on the evidence available, the terms of the escrow agreement as disclosed in the agreement and the fees payable as referred to in the emails made the escrow arrangements look too good to be bona fide.  I would, however, make haste to say that this is still the early stage of the proceedings and my observation is made only for the disposal of this application.

53.  Regarding section 7 of the Partnership Ordinance, it all depends on whether the so-called stand-alone escrow arrangements made between Aggarwal and Mr Yang’s companies can or cannot be said to be part of the defendant’s usual business.  This is hotly disputed by Mr Tso, who says in effect that such arrangements were not, and could not be, for fund proof.  In the light of my observation above, this matter should also be tried. 

54.  There are also the questions of whether Aggarwal in fact had no authority to act for the defendant in entering into these apparently unusual escrow arrangements and whether Mr Yang and/or his colleagues were aware of the lack of authority in Aggarwal. 

55.  Regarding the question of independent legal personality in the 44 completed arrangements, I think the question of their relevance to the two escrow agreements is also a matter that needs to be tried. I note that the defendant’s case is pinpointed at Mr Yang and his colleagues who were behind their companies in effecting these arrangements and benefitting from the defendant’s client account to the tune of HK$48,327,900.05. 

56.  Regarding the fact that these transactions took place over a period of 2½ years and involved many persons in the defendant, this again is a matter to be canvassed at the trial.  I do note that Mr Michael Chan has already said in his affidavit that he was not aware of the fraud and had relied on Mr Aggarwal.  Discovery by the defendant may show the identities of other people who were involved in the processing of these arrangements and remittances.  It may be necessary to canvass the extent of their knowledge, if any, in Aggarwal’s fraud. 

57.  For the application of section 12 of the Partnership Ordinance, it again depends on whether Aggarwal was acting in the ordinary course of business of the defendant in effecting these escrow arrangements. 

58.  Finally, on the un-pleaded claim of money had and received, I think there is the need to find out at the trial whether the money was paid to the defendant in the defendant’s own right, or rather were loaned to Aggarwal by being channelled into the defendant’s client account to cover up the deficit created by Aggarwal’s wrong doing.

Order

59.  In these premises, I cannot give summary judgment to the plaintiff.  I also do not think this is a case for conditional leave to the defend as the defendant’s defence is not shadowy at all.  However, I do not think I should dismiss the plaintiff’s Order 14 summons as the defendant’s arguments in defence only came out in Mr Tso’s affidavits and not prior to the plaintiff’s summons.

60.  I, therefore, give the defendant unconditional leave to defend with a costs order nisi that the costs of the application be in the cause.  I also certify the application fit for leading counsel.

(L. Chan) Deputy High Court Judge

Ms Linda Chan, SC, instructed by Messrs Tse Yuen Ting Wong, for the Plaintiff

Mr Charles Sussex, SC, instructed by Messrs Robertsons, for the Defendant