RICH PROFIT CREATION LTD v. KO CHUNG LUN AND OTHERS

HCA 1207/2017 & 1865/2017
(consolidated)

[2022] HKCFI 2939

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1207 of 2017 AND 1865 of 2017

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(Consolidated by Order of Master Ho dated 1^st March 2019)

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D E C I S I O N

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1.  On 27 June 2022, this Court handed down Judgment in the action, finding that the 1^st, 2^nd and 6^th Defendants held the sum of HK$3,580,380 as trustees for the Plaintiff, and that the 1^st and 2^nd Defendants held the further sum of US$4,728,132 on trust for the Plaintiff, that the said sums and interest should be paid by the 1^st, 2^nd and 6^th Defendants to the Plaintiff, and that they should further account for the said sums. The said Defendants were ordered to pay the costs of the action to the Plaintiff.

2.  Although the Plaintiff had maintained and pursued its claims of conspiracy against the 3^rd, 4^th and 5^th Defendants at trial, no orders were made on the claims since the Court found that there was no evidence to prove that the 3^rd, 4^th and 5^th Defendants had taken steps with the intention to injure the Plaintiff by any unlawful means.

3.  The orders made under the Judgment were perfected when the Judgment orders were drawn up, sealed, and filed on 22 July 2002.

4.  It was only on 4 August 2022 that the 3^rd, 4^th and 5^th Defendants (“Applicants”)  applied by summons for their costs of the action to be paid by the Plaintiff to them (“Summons”).

5.  I accept the submissions made on behalf of the Plaintiff, that the application made under the Summons was after the period of 14 days prescribed under Order 42 rule 5B RHC, and that even if the Applicants are right in contending that the order for costs made in the Judgment was an order nisi, such order had become absolute on 11 July 2022.

6.  Notably, there was no application made in the Summons for either relief against sanctions, extension of time to apply for variation of the costs order nisi, or to set aside the order absolute perfected and sealed on 22 July 2022. Nor was there any evidence filed on behalf of Applicants to furnish any explanation for the delay in applying for variation of the costs order, which is one of the matters which the Court is required to consider under Order 2 rule 5, as part of all the circumstances of the case, in deciding whether to grant relief for any sanction imposed for a failure to comply with any rule or order of the Court.

7.  On the authorities referred to by Counsel for the Plaintiff (Poon Ching Man v Lam Hoi Pun [2016] 3 HKLRD 815, Sek Chiu Yue v Secretary for Justice [2019] 6 HKC 273, Universal Entertainment Corp v Okada[2021] HKCFI 3432 and RTX Products v Li Yiu Fai, unreported, HCA 1777/2009, 12 November 2014), I am not satisfied that I have either the power or the necessary evidence of grounds to exercise my discretion to vary the costs order absolute made and to allow instead the Applicants to have their costs paid by the Plaintiff.  The decision relied upon by the Applicants (Winston Camara & Radio Co Ltd v Combi (Singapore)  PTE Ltd [1988] HKC 156)  was made prior to the CJR and before the application of Order 2 rule 5, and the decision of the Court of Appeal in Sek Chiu Yue is more apposite.

8.  For all the above reasons, the Summons is dismissed, with costs to be paid by the Applicants to the Plaintiff, to be summarily assessed.  The Plaintiff is to file and serve its schedule of costs within 7 days and the Applicants shall file and serve any statement of objection within 7 days thereafter.

Mr Vincent Chiu, instructed by Foo, Leung & Yeung, for the plaintiff

Mr Kevin CW Wong, instructed by Li, Chow & Company, for the 3^rd to 5^th defendants

HCA 1207/2017 & 1865/2017
(consolidated)

[2022] HKCFI 1946

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1207 of 2017 AND 1865 of 2017

________________________

________________________

(Consolidated by Order of Master Ho dated 1^st March 2019)

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J U D G M E N T

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Background

1.  The Plaintiff is a company incorporated in Hong Kong.  In August 2010, it entered into a joint venture with a Mainland company (“Mainland Shareholder”), to form a joint venture company (“HJV”)  for development of a property on the Mainland (“Project”). The Plaintiff was the 49% shareholder and the Mainland Shareholder was the 51% shareholder of the HJV. A Joint Venture Agreement was signed between the Plaintiff and the Mainland Shareholder on 6 August 2010, to govern the operations of the HJV. Clause 9 of that agreement required the Plaintiff to inject RMB 49 million into the Project.

2.  The Plaintiff was initially used as an investment vehicle company by Mr Ng Kwun Wan (“Ng”)  and Mr Choi Siu Pang (“Choi”).  In around 2011, Ng and Choi invited the 1^st Defendant Mr Ko Chung Lun (“Ko”)  to participate in the joint venture Project, and Ko agreed. Ko nominated the 2^nd Defendant (“Dignity”), a Hong Kong company the shares of which were wholly owned by Ko’s sister, the 5^th Defendant Madam Ko Yu Man (“Sister”), as the vehicle to participate in the Project.  The Sister was at all material times the sole shareholder and director of Dignity. On their part, Ng and Choi nominated a Hong Kong company Target Well Investment Development Limited (“TW”)  to be their participating vehicle. Dignity became the 43.5% shareholder in the Plaintiff, with TW holding the remaining 56.5% of the shares.

3.  A Shareholders’ Agreement (“SHA”)  was signed between TW and Dignity on 17 January 2011. According to the SHA, each of TW and Dignity agreed to advance RMB 15 million as an interest-free shareholder’s loan to the Plaintiff, and Dignity was to procure external borrowing of a further RMB 19 million for the Plaintiff. The “external borrowing” of RMB 19 million was made by the 3^rd Defendant, Kota International Limited (“KIL”)  (“KIL Loan”), but the Plaintiff claims that unbeknownst to it, KIL was in fact beneficially owned and controlled by Ko’s wife, Madam Yeung Ying who is the 4^th Defendant (“Wife”).

The claims made

4.  The Plaintiff’s claim is that since the inception of the Project from about August 2010, funding was required to be injected by the Plaintiff into the Project from time to time. After Ko’s involvement in 2011, according to the Amended Consolidated Statement of Claim (“SOC”): it was agreed amongst the Plaintiff, TW, Dignity and Ko that when payments were required to be made to the HJV or other Mainland entities pursuant to the Project, Dignity and/or Ko (or their nominees)  would first receive the funds from the Plaintiff, and then would transfer the same to HJV or other Mainland entities as may be directed, for and on behalf of the Plaintiff, as trustees of the funds received, or alternatively as agents for the Plaintiff (“Funding Agreement”). The Plaintiff claims that it was implicit in the Funding Agreement that when payments were made pursuant to the joint venture Project by HJV or other Mainland entities to Dignity and/or Ko (or their nominees)  for the benefit of the Plaintiff, Dignity and/or Ko (or their nominees)  would first receive the funds for the Plaintiff, and then would be obliged to transfer such funds to the Plaintiff (paragraph 6D SOC).

5.  On about 24 August 2011, the HJV entered into an agreement with a Mainland entity (“HCT”), pursuant to which HJV had to pay RMB 30 million to HCT within 20 days of the signing of the agreement. The Plaintiff as the joint venture partner of the HJV was accordingly required to contribute RMB 30 million by way of a shareholder’s loan to the HJV for the property development project and as working capital. According to the SOC, it was agreed between Ng and Ko, Ng acting on behalf of the Plaintiff and Ko acting for himself and on behalf of Dignity, that the Funding Agreement would be applied to the injection of the RMB 30 million into the HJV. The Plaintiff claims that the agreement was made through telephone conversations and emails exchanged.

6.  On the Plaintiff’s pleaded case, the Plaintiff transferred to Ko’s nominee, the 6^th Defendant Best Cheer Development Limited (“BC”), on 23 May 2011 a sum of RMB 3 million (“1^st Sum”); and to the joint account of Ko and the Wife on 14 September 2011 a further sum of RMB 30 million (“2^nd Sum”). The 1^st Sum and the 2^nd Sum were transferred to BC and Ko/Wife pursuant to the Funding Agreement, as money required for HJV, were received by BC, Ko and the Wife as trustees/agents, and were to be held by Ko/Dignity and BC (as Ko’s nominee)  to hold as trustees for the Plaintiff, for the purpose of advancing and transferring the same to HJV, and to hold any repayment when received from the HJV.

7.  The Plaintiff claims that by virtue of the Funding Agreement and their receipt of money from the Plaintiff, BC, Ko/Dignity owed duties as trustees to the Plaintiff, to apply the 1^st Sum and the 2^nd Sum (“Trust Funds”)  pursuant to the Funding Agreement, to safeguard the Trust Funds and not to dissipate them, and not to use the Trust Funds for an improper purpose (paragraph 10, SOC). The Plaintiff further claims that by reason of the Funding Agreement, Ko’s shadow or de facto directorship in the Plaintiff, and the agency relationship between the Plaintiff as principal and BC, Ko and/or Dignity as agent, BC, Ko and Dignity owed to the Plaintiff fiduciary duties: not to place themselves in positions of conflict with the Plaintiff; not to profit from their position as fiduciaries; to act in the best interests of the Plaintiff in good faith; to keep the Trust Funds in safe custody for the Plaintiff and to account for the same to the Plaintiff; to act in accordance with the terms of their authority, which is to advance the Trust Funds to the HJV for and on behalf of the Plaintiff; and upon receipt of money for the Plaintiff as principal, to pay over or account for that money at the request of the Plaintiff (paragraphs 11 and 11A, SOC).

8.  The Plaintiff alleges that instead of advancing and transferring the 1^st Sum and the 2^nd Sum to the HJV, on behalf of the Plaintiff and pursuant to the Funding Agreement, Ko, BC, Dignity, the Sister (who was the sole director and shareholder of Dignity), the Wife and KIL (which is a company incorporated in Hong Kong of which the Wife is the sole shareholder and director)  all conspired together with the intent to injure the Plaintiff by unlawful means. As opposed to advancing the Trust Funds received from the Plaintiff to HJV, as agents and trustees of the Plaintiff, Ko (representing Dignity, and on his own behalf)  represented to HJV that Ko and/or Dignity were the providers of the 1^st Sum and the 2^nd Sum and hence were the creditors of HJV.

9.  At a board meeting of the HJV held on 21 May 2015, which was attended by Ko as a director, the HJV’s board resolved to return the 1^st Sum and the 2^nd Sum to Ko and his nominees, instead of to the Plaintiff. The money was received by Ko, who refused to account for the same to the Plaintiff or to return same to the Plaintiff.

10.  The Plaintiff claims that by representing to the HJV that the Trust Funds were advanced to the HJV by Ko and/or Dignity, BC and/or Ko and/or Dignity had misapplied the Trust Funds, were in breach of the trust over the Trust Funds and in breach of their fiduciary duties owed to the Plaintiff.  In receiving the 1^st Sum from the Plaintiff on 23 May 2011, and representing to the HJV that it was advanced by Ko and/or Dignity, the Plaintiff claims that BC, Ko and Dignity were in breach of their fiduciary duties as trustees and agents, by putting themselves in a position where their interests conflicted with those of the Plaintiff, had not acted in the best interests of the Plaintiff, and were in breach of their authority as agents of the Plaintiff.  The Plaintiff alleges that Ko, Dignity and BC all had knowledge of the falsity of the representations to the HJV, that it was Ko and/or Dignity which had advanced the 1^st Sum and the 2^nd Sum to the HJV, and that the money should be repaid to Ko/Dignity instead of the Plaintiff. The Plaintiff claims that Ko’s knowledge was to be attributed to Dignity and BC, which are both nominees of Ko.

11.  The Plaintiff claims that the money received from HJV should be held by BC, Ko/Dignity on trust, as constructive trustees for the Plaintiff. It further claims that Ko, Dignity, BC, the Sister, the Wife and KIL had conspired to injure the Plaintiff and to cause loss to the Plaintiff by unlawful means, namely by BC/Ko/Dignity acting in breach of trust and in breach of their fiduciary duties, and that they had all acted in concert and carried out their conspiracy, and had deprived the Plaintiff of the Trust Funds.

12.  On the Plaintiff’s case, the Wife was a party to the conspiracy and had assisted Ko/Dignity’s breach of trust and/or breach of fiduciary duties by firstly, receiving the 2^nd Sum in her bank account held jointly with Ko, and failing to return the 2^nd Sum to the Plaintiff, and further, by procuring KIL (of which she was the sole shareholder and director)  to commence legal proceedings and obtaining default judgment against the Plaintiff for recovery of the loan of RMB 19 million.

13.  The Plaintiff’s claims against the Sister were on the basis of her being a party to the conspiracy and her assistance in Ko/Dignity’s breach of trust/fiduciary duties by “carrying out all relevant corporate acts of Dignity”, and further, by procuring Dignity to commence proceedings on the Mainland to seek recovery of the loan due from the Plaintiff.

14.  KIL (controlled by the Wife)  was alleged to be a party to the conspiracy by commencing proceedings in Hong Kong, obtaining default judgment against the Plaintiff in respect of the loan due from the Plaintiff, and bringing winding up proceedings against the Plaintiff.

15.  As against the Sister, the Wife and KIL (referred to by the Plaintiff as “Accessories”), the Plaintiff only pursued the claim of conspiracy at trial, having abandoned the pleaded claims of dishonest assistance and undue enrichment against them.

16.  In these proceedings, the Plaintiff seeks by way of relief: declarations that BC and/or Ko and/or Dignity held the 1^st Sum and its traceable proceeds on trust, and that Ko and/or Dignity held the 2^nd Sum and its traceable proceeds on trust, for the Plaintiff; orders that Ko, the Sister, Dignity, BC and the Wife account to the Plaintiff for the Trust Funds; orders for the Defendants to return the Trust Funds to the Plaintiff; and alternatively, damages.

Whether Funding Agreement or Loan Retrieval Agreement

17.  Ko and Dignity deny that there was a Funding Agreement as alleged. They claim that funds for the HJV/Project were only required since May 2012, and that there had been no need for funds in 2011.

18.  In relation to the transfer of the 1^st Sum (of RMB 3 million)  from the Plaintiff to BC, Ko denies that it was transferred from the Plaintiff to him (via BC)  pursuant to the alleged Funding Agreement, claiming instead that this was the “1^st Loan Reduction”. According to Ko, there was no progress in the Project at the relevant time, and the funds injected by Ko into the Plaintiff together with the KIL Loan had not been employed.  On Ko’s case, Ng and Choi suggested, and Ko agreed, that the shareholders’ loans should be reduced by RMB 1.5 million each, totaling RMB 3 million (“1^st Loan Retrieval Agreement”). On the Defendants’ pleaded case, it was pursuant to the 1^st Loan Retrieval Agreement that the 1^st Sum of RMB 3 million was paid by the Plaintiff to BC on 18 May 2011.

19.  On this pleaded case, there are already inherent inconsistencies.  If there was indeed an agreement made amongst Ng, Choi and Ko, that the shareholders’ loans (from TW and Dignity)  should be reduced by a total of RMB 3 million, that cannot explain why there should be a payment of RMB 3 million from the Plaintiff to Ko’s nominee, BC, or to Ko’s camp. If there should be reduction of Ko/Dignity’s loan as a shareholder to the Plaintiff, it should be a payment of RMB 1.5 million. There was no explanation as to why there should be a payment of RMB 3 million to Ko /Dignity, or BC on Ko’s behalf.

20.  As Counsel for the Plaintiff pointed out, there was no reason at all why the 1^st Loan Reduction, as alleged by Ko, could not have been paid directly to the shareholders, namely TW/Ng and Choi on the one part and Dignity/Ko on the other part, but had to be paid to Ko’s camp, for “distribution” by Ko to Ng’s camp, as Ko sought to explain in his witness statement. The payment of HK$3,580,380 to BC (equivalent to RMB 3 million)  was made to BC’s bank account in Hong Kong (as was the 2^nd Sum), so no question arose as to any need to make payment in RMB currency or on the Mainland, and hence there was no need to make payment to Ko’s camp first.

21.  The assertion of the 1^st Sum being paid as a loan reduction and pursuant to the 1^st Loan Retrieval Agreement is also inconsistent with the contemporaneous documents. The transfer from the Plaintiff and the payment of HK$3,580,380 to BC (equivalent to RMB 3 million)  into BC’s bank account was on 23 May 2011, as evidenced by the bank withdrawal and deposit slips.  These documents contradict Ko/Dignity’s claim, that the 1^st Loan Reduction was made on 18 May 2011.

22.  On the Plaintiff’s case, the 1^st Sum was required as a shareholder’s loan for HJV’s working capital, and it was transferred to BC/Ko pursuant to the Funding Agreement for onward payment to the HJV. This is evidenced by an email from Ng’s secretary to Ko and the Sister, by which the latter were asked to arrange for the transfer of RMB 3 million into the account of HJV on the Mainland, and it was stated in the email that Ng would arrange for the Plaintiff to transfer the Hong Kong dollar equivalent into the account of Ko as designated. The transfer of HK$3,580,380 to BC followed, on 23 May 2011.

23.  Although Ko claimed in his witness statement that the entire sum of the alleged 1^st Loan Reduction of RMB 3 million was paid to BC, and that he had distributed half of the amount received to Ng’s camp, there are no supporting documents, and no particulars whatsoever as to when and how the alleged distribution was made.

24.  As for the 2^nd Sum, the pleaded defence is that this was paid as a result of the suggestion made by Ng and Choi in September 2011, that there should be a further reduction of the respective shareholders’ loan by RMB 5 million each, totaling RMB 10 million, since there was still no progress in the Project. The suggestion was accepted by Ko (“2^nd Loan Retrieval Agreement”). According to Ko, loans would be made to the Plaintiff again, when circumstances called for same.

25.  At paragraph 36 of the Amended Consolidated Defence (“Defence”), it is pleaded that of the 2 loan retrievals, Ng and Choi asked Ko to have custody of the sum of RMB 6.125 million, representing TW’s reduced loan, and that this was to facilitate Dignity’s dispatch of money for the use of Ng and Choi on the Mainland.

26.  Ko also claims (at paragraph 37 of the Defence)  that at the same time as the 2^nd Loan Retrieval Agreement, Ko proposed, and Ng and Choi agreed, that the Plaintiff should lend RMB 20 million to Ko, for Ko to apply the money for “other gainful use”, and that the loan would be repaid by Ko as and when HJV required working capital (“Ko Loan Agreement”).

27.  It was pursuant to the 2^nd Loan Retrieval Agreement, and the Ko Loan Agreement, that (on the Defendants’ case)  the 2^nd Sum (of RMB 30 million)  was transferred by the Plaintiff to Ko, into Ko’s bank account (which was subsequently revealed to be a joint account of Ko and Wife).

28.  Again, Ko’s assertion of the 2^nd Loan Retrieval Agreement is unsupported by any evidence, and is as incredible as the 1^st Loan Retrieval Agreement. When the SHA between TW and Dignity had only been signed in January 2011 for Dignity’s participation in the HJV, it is incredible that the parties would have agreed shortly thereafter, in May 2011, for their shareholders’ loans to HJV to be reduced. It is particularly incredible that the parties would have agreed on a loan reduction in September 2011, when there is evidence that the HJV had signed an agreement with HCT on 24 August 2011, under which HJV had to make payment to HCT of RMB 30 million on a property investment within 20 days of the signing of the agreement, such that the Plaintiff would be required to provide funding for the HJV in September 2011.

29.  The Plaintiff’s case for payment of the 2^nd Sum is supported by the contemporaneous correspondence.  On 9 September 2011, Ng had emailed Ko, referring to the property development agreement signed by HJV, and pointing out that the HJV had to make payment of RMB 30 million before 13 September 2011. Ng set out the payment arrangement in the email, for the Plaintiff to arrange for RMB 30 million to be transferred to the account of the HJV, to enable HJV to make payment to HCT. Ko was requested in the email to arrange for payment of the RMB amount into the HJV account, and it was stated that the Plaintiff would arrange for an equivalent amount of Hong Kong dollars to be paid into Ko’s designated account. A sum of US $4,728,132 was then deposited into Ko and the Wife’s account with HSBC in Hong Kong on 14 September 2011.

30.  I agree with the criticism made by Counsel for the Plaintiff, that Ko’s explanation for and account of the 1^st Sum, the 2^nd Sum, and how they are allegedly related to the 2 loan reductions, are convoluted, confusing and hence unreliable and unbelievable.

31.  On Ko’s case, the total amount under the 1^st and 2^nd Loan Retrieval Agreement should be RMB 6.5 million. Perhaps to explain why the loan reductions which were supposedly proposed by Ng and Choi had never been paid directly to them, the original and pleaded case was that Ko was asked by Ng and Choi to keep the loan reductions on their behalf, pending Dignity’s dispatch of money for their use in the Mainland in the future. However, the pleaded defence is that Ko was asked to keep RMB 6.125 in his custody, instead of RMB 6.5 million. He never explained the difference, and how RMB 6.125 million was calculated, only maintaining that RMB 6.125 million had been returned to Ng and Choi.

32.  In relation to the alleged repayment of the RMB 6.125 million (representing on Ko’s case at least part of the 2 alleged loan reductions)  Ko pleaded in the Defence that he had returned RMB 1 million to Ng on 11 May 2011, and RMB 1.45 million to Choi on 19 September 2011, and that the balance had been “subsequently returned”, without any particulars or documentation in support.

33.  Again, the pleaded case is itself riddled with inconsistencies.  On the one hand, it was claimed that the RMB 6.125 comprised the loan reductions agreed in May and September 2011. On the other hand, it was claimed that repayment of the RMB 6.125 million Ko held in custody for Ng and Choi had been paid back to Ng in part, on 11 May 2011, in the sum of RMB 1 million. As Counsel for the Plaintiff pointed out, this is inherently improbable, in fact impossible, as the alleged repayment preceded the payment of the 1^st Sum on 23 May 2011.

34.  It is therefore readily apparent that Ko’s account of the 1^st Sum and the 2^nd Sum as loan reductions, which had been fully paid to Ng and Choi, is a convoluted concoction, and totally unreliable to be accepted by way of defence.

35.  Ko repeatedly claimed, at paragraph 42 of the Defence and in his evidence and testimony in Court, that he had made loans of RMB 33 million to the HJV, and that the sum he had received as repayment by the HJV, and the RMB 33 million claimed by the Plaintiff, represented money he had advanced from his own sources. However, there have never been any particulars of Ko’s alleged loans, when and how they were made, and the amounts lent. There is no counterclaim made by Ko against the Plaintiff in relation to any sum said to have been advanced by him to HJV on behalf of the Plaintiff, or otherwise payable by the Plaintiff to Ko in respect of the advances made. Without any evidence in support, Ko’s claims ring hollow.

36.  To add credence to his claim that the 2^nd Sum included a loan of RMB 20 million, Ko sought to rely on his purported repayment of RMB 10 million to the Plaintiff on 21 May 2012, and RMB 10 million to the Plaintiff on 7 June 2012.  However, the contemporaneous emails from Ko’s assistant (Ida)  of 23 May 2012 and 7 June 2012 contradict Ko’s evidence. The email of 23 May 2012 referred to the payment of HK$11.85 million (corresponding to RMB 10 million)  as the Plaintiff’s “investment sum”, and the email of 7 June 2012 likewise referred to the Plaintiff’s “second investment sum” of HK $12 million (corresponding to RMB 10 million). Ko’s excuse, that his assistant referred to all his payments into the Plaintiff’s account as “investments”, and that she had been mistaken about the true nature of the payments, is not at all convincing.

37.  On the Plaintiff’s case, there was no Ko Loan Agreement, and the 2 payments made into the Plaintiff’s account on 21 May and 7 June 2012 were further injections of capital contribution required for the Joint Venture Agreement between the Plaintiff and the Mainland Shareholder.

38.  The other excuses and reasons put forward by Ko, that the RMB 30 million under HJV’s agreement with HCT was required by the HJV, and not by the Plaintiff; that money had to be remitted to HJV on the Mainland and that the funds in the Plaintiff’s account in Hong Kong were useless because they could not be remitted to HJV; that the Plaintiff did not have any bank account on the Mainland, and that the money for HJV had to be provided by Ko’s companies on the Mainland; do not constitute a defence to the claims made by the Plaintiff under the Funding Agreement. The suggestion of illegality was never pleaded. All the reasons put forward by Ko actually support the existence of the Funding Agreement, as it was precisely because money had to be paid to the HJV on the Mainland, in RMB, that the Funding Agreement was made on the terms alleged.

39.  Having considered the contemporaneous documents, and the evidence adduced by Ng and Ko, I accept that there was a Funding Agreement made, on the terms claimed by the Plaintiff, and that the 1^st Sum and the 2^nd Sum were paid by the Plaintiff to Ko and his nominees, for the purposes of forwarding same to the HJV for and on behalf of the Plaintiff.

40.  Under and by virtue of the Funding Agreement, BC, Ko/Dignity received property (namely funds)  from the Plaintiff not in their own right but for the Plaintiff, and they assumed control and power over the funds, for the designated purposes of making payment to HJV on the Plaintiff’s behalf. Not only were BC, Ko/Dignity put in a position whereby they were able to exercise control and to abuse their power over the funds to the detriment of the Plaintiff, but Ko, his nominees and Dignity agreed to assume duties as to how the funds were to be used.  BC, Ko and Dignity were clearly trustees in respect of the money received, whether under an express trust, or as constructive trustees liable in equity to account for the trust assets as if they were trustees (Williams v Central Bank of Nigeria [2014] AC 1189).

41.  As such, Ko and Dignity owed fiduciary duties in terms of those pleaded in the SOC, and by representing to HJV that the 1^st Sum and 2^nd Sum paid over to the HJV represented funds of Ko and his nominees, rather than of the Plaintiff, and by failing to account to the Plaintiff and to pay over to the Plaintiff the repayment received from HJV, Ko, BC and Dignity had clearly acted in breach of their fiduciary duties.

42.  Even if Ko had himself made advances from his own resources to the HJV (which has not been proved by any evidence adduced in this case), it does not detract from the fact that he had received money from the Plaintiff/Ng and Choi for forwarding to the HJV, on terms agreed, which placed him under duties of trust and confidence to exercise his powers over the money received, for the purposes received, and not to put himself in a position of conflict, whereby he can deal with money repaid by HJV and put in his control as he considered fit and in his own interests only, without accounting to the Plaintiff.

43.  Ko did not dispute at trial that Dignity and BC were his vehicles, and were nominees under his control at least for the purposes of or in relation to the HJV.

44.  BC was the recipient of the 1^st Sum, and Ko’s knowledge of the terms of the Funding Agreement, and of his acting in breach of the fiduciary duties imposed on him and Dignity thereunder, are to be imputed to both Dignity and BC. BC had received the 1^st Sum, and is liable to account to the Plaintiff and to repay the trust money to the Plaintiff as constructive trustee.

45.  On my findings, Ko, Dignity (as Ko’s nominee)  and BC (as Ko’s nominee and as recipient of the 1^st Sum)  were in breach of trust and of fiduciary duties owed to the Plaintiff and are liable to account, and to repay to the Plaintiff the 1^st Sum and 2^nd Sum.

Liability of KIL, Wife and Sister

46.  As stated above, the Plaintiff only pursued it claims of unlawful means conspiracy against KIL, the Wife and the Sister.

47.  There is no dispute that the KIL Loan was made by KIL to the Plaintiff, and that the Plaintiff had had use of the KIL Loan, whether or not it was an “external borrowing”. There was nothing unlawful or improper for KIL to take steps and institute proceedings against the Plaintiff for recovery of the KIL Loan when it was not repaid.

48.  Even if KIL can be said to be party to the alleged scheme to injure the Plaintiff by taking steps to seek recovery of the KIL Loan, on the evidence available, it is more likely than not that KIL, and the Wife behind KIL, had been procured to act as they did by Ko.

49.  Nor is there any or any sufficient evidence to show that the Wife and the Sister had knowledge of any facts regarding the Funding Agreement, and the agreed manner of use of the 1^st Sum and the 2^nd Sum, to suggest to them that Ko/Dignity were acting in breach of their fiduciary duties owed to the Plaintiff, Ng and Choi. There is no evidence that the Sister had attended the meeting at which it was resolved to return the RMB 33 million to Ko and his associates or nominees, or that she had represented to the HJV that the 1^st Sum and the 2^nd Sum were advanced by Ko and not the Plaintiff/Ng/Choi, such that the payment to and receipt by Ko of the money received from HJV was in breach of trust.

50.  Although the Sister was the shareholder and director of Dignity, it is more probable that she had acted on the directions of Ko and that it was Ko rather than the Sister who was the directing mind of Dignity.

51.  On the whole, there is no evidence to prove that KIL, the Wife and the Sister, in taking the steps they did and as complained of by the Plaintiff, had the intention to injure the Plaintiff by any unlawful means.

52.  Although neither the Wife nor the Sister had turned up at trial to give evidence, and the Plaintiff had invited the Court to draw adverse inferences against them, I am not satisfied that there is sufficient evidence to find that the Plaintiff has discharged its burden of proof so far as the liability of KIL, the Wife and the Sister are concerned.

Disposition

53.  On the basis of my findings of breach of trust, the Plaintiff’s claims for relief against Ko, Dignity, and BC are allowed in terms of the prayer to the SOC, including an order that they should pay to the Plaintiff the costs of the action.

54.  No orders are made against KIL, the Sister and the Wife.

Mr Vincent Chiu, instructed by Foo, Leung & Yeung, for the plaintiff

Mr Kevin CW Wong and Mr Victor KH Chiu, instructed by Li, Chow & Company, for the 1^st to 6^th defendants

HCA1207/2017 and HCA 1865/2017

[2020] HKCFI 1459

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NOS 1207 OF 2017 AND 1865 OF 2017

______________

______________

(Consolidated by the Order of Master Ho dated 1^st March 2019)

____________________

DECISION

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A.INTRODUCTION

1.  This is the plaintiff’s appeal against the Master’s order made on 13 January 2020 whereby he dismissed the plaintiff’s application by summons dated 3 October 2019 for interim payment against the defendants. Although the summons was issued against all defendants, the plaintiff confirmed at the hearing that it is seeking interim payment against the 1^st, 2^nd and 6^th defendants only. It is trite that this appeal is a hearing de novo.

2.  The 1^st defendant is a de facto director of the plaintiff, and the 2^nd and 6^th defendants are his nominees. The 2^nd defendant, representing the 1^st defendant’s interest, is a shareholder of the plaintiff. The plaintiff claims that, in 2011, it had given two sums of money to the 1^st, 2^nd and 6^th defendants, which were intended to be used as loans to be advanced to a joint venture in the Mainland to which the plaintiff was a party. However, it was discovered subsequently that the defendants did not use the money for such purpose; they lent monies to the joint venture in their own names (rather than in the name of the plaintiff) instead. Hence, the defendants are liable to account for the money that they had received. The defendant’s case is that, out of the money received by them, part of it was in fact partial repayment of shareholders’ loan from the plaintiff, and the remaining sum were a personal loan advanced by the plaintiff to the 1^st defendant which he had repaid in 2012. The plaintiff seeks interim payment on the ground that the defendants’ case is wholly unbelievable.

B.  THE PLAINTIFF’S CLAIM

3.  The plaintiff, incorporated in about 2009, was initially used as an investment vehicle by Mr Ng Kwan Wan (“Mr Ng”) and Mr Choi Siu Pang Jusiah (“Mr Choi”) to participate in a Sino-foreign joint venture property development project in Tianjin (“the JV”). It was a 49% shareholder in the joint venture company for such project (“the JV Company”). On or about 6 August 2010, the plaintiff executed a joint venture agreement with the Mainland partner (“the JV Agreement”). Clause 9 of the JV Agreement provided, inter alia, that the plaintiff shall inject RMB¥49million into the JV.

4.  Mr Ng and Mr Choi invited the 1^st defendant to participate in the JV. Hence, on or about 14 January 2011, the 2^nd defendant, being the corporate vehicle of the 1^st defendant, became a shareholder of the plaintiff holding 4,350 shares (43.5%). Target Well Investment Development Ltd (“Target Well”), representing the interest of Mr Ng and Mr Choi, became the other shareholder holding 5,650 shares (56.5%). Although the 1^st defendant was not formally appointed as a director, it is not in dispute that he acted as a de facto director of the plaintiff.

5.  On 17 January 2011, Target Well and the 2^nd defendant signed a shareholders’ agreement (“the Shareholders’ Agreement”). Under clause 5 of the Shareholders’ Agreement, each shareholder agreed to advance a sum of HK$ equivalent to RMB¥15million by way of interest free loans to the plaintiff; and the 2^nd defendant further agreed to procure an external borrowing of a sum of HK$ equivalent to RMB¥19 million to be advanced to the plaintiff. The total sum would be RMB¥49million, which was indeed the sum that the plaintiff was obliged to inject into the JV Company under the JV Agreement.

6.  In addition to the RMB¥49 million just mentioned, the plaintiff was required to advance further loans to the JV Company from time to time.

7.  The present claim concerns two sums of the money. The first sum involves HK$3,580,380.00 (“the First Sum”):

(a)  By an email dated 16 May 2011, Mr Ng on behalf of the plaintiff instructed the 1^st defendant to remit RMB¥3million to the JV Company’s bank account in Tianjin, and stated that he would arrange the plaintiff to transfer an equivalent amount in HK$ to an account designated by the 1^st defendant.

(b)  On 23 May 2011, the plaintiff transferred a sum of HK$3,580,380.00 (equivalent to RMB¥3million) to an account of the 6^th defendant, which was another corporate vehicle used by the 1^st defendant.

8.  The second sum involves US$4,728,132.00 (“the Second Sum”):

(a)  By an email dated 9 September 2011, Mr Ng instructed the 1^st defendant to transfer RMB¥30million to the JV Company’s same bank account in Tianjin, and stated that the plaintiff would transfer the same amount in HK$ to the 1^st defendant’s designated account.

(b)  On 14 September 2011, the plaintiff transferred a sum of US$4,728,132.00 (equivalent to RMB¥30million) to a joint account held by the 1^st defendant and his wife, the 4^th defendant.

9.  The plaintiff discovered subsequently that, in fact, the 1^st defendant purported to lend a total sum of RMB¥33million to the JV Company through himself and his associates. By a board resolution of the JV Company passed on 21 May 2015, it was resolved that the JV Company shall repay the loan of RMB¥33million with interest at 10% per annum lent by the 1^st defendant and his associated companies. The 1^st defendant admitted that the JV Company had in fact repaid the said sum to him.

10.  The plaintiff’s case is that the 1^st, 2^nd and 6^th defendants are liable to account for the First and Second Sums because they had not been used for their intended purpose.

C.  THE DEFENDANTS’ DEFENCE

11.  The defendants allege that, as of May 2011, the JV had no progress. Hence, Mr Ng and Mr Choi suggested, and he agreed, to reduce the shareholders’ loan by RMB¥1.5million for each shareholder respectively ie a total sum of RMB¥3million (“the 1^st Loan Retrieval Agreement”). Hence, the 1^st Sum was paid on 18 May 2011 to the 6^th defendant for distributing the money to the parties. The 1^st defendant then distributed half of the sum to Mr Ng’s camp.

12.  The 1^st defendant further alleges that, about 4 months later in September 2011, they again agreed to reduce the shareholders’ loan by RMB¥5milliion to each shareholder respectively i.e. a total sum of RMB¥10million (“the 2^nd Loan Retrieval Agreement”). At the same time, it was agreed that 1^st defendant would borrow personally RMB¥20million from the plaintiff (“the 1^st Defendant’s Loan Arrangement”). Hence, on 14 September 2011, pursuant to these two agreements, the plaintiff paid the Second Sum. The 1^st defendant said he had dispatched RMB¥1million and RMB¥1.45million to Mr Ng’s bank account and Mr Choi’s bank account respectively on 11 May 2011 and 19 September 2011. The 1^st defendant also claims that he repaid the personal loan of RMB¥20million to the plaintiff in May 2012.

D.  THE PRINCIPLES FOR INTERIM PAYMENT APPLICATION

13.  Order 29, rule 11(1)(c) of the Rules of the High Court (Cap. 4) (“RHC”) provides that:

“If, on the hearing of an application under rule 10 in an action for damages, the Court is satisfied…that, if the action proceeded to trial, the plaintiff would obtain judgment for substantial damages against the respondent or, where there are two or more defendants, against any of them, the Court may, if it thinks fit and subject to paragraph (2), order the respondent to make an interim payment of such amount as it thinks just, not exceeding a reasonable proportion of the damages which in the opinion of the Court are likely to be recovered by the plaintiff after taking into account any relevant contributory negligence and any set-off, cross claim or counterclaim on which the respondent may be entitled to rely.”

14.  Order 12, rule 12(c), RHC, provides further that:

“If, on the hearing of an application under rule 10, the Court is satisfied that, if the action proceeded to trial, the plaintiff would obtain judgment against the defendant for a substantial sum of money apart from any damages or costs, the Court may, if it thinks fit, and without prejudice to any contentions of the parties as to the nature or character of the sum to be paid by the defendant, order the defendant to make an interim payment of such amount as it thinks just, after taking into account any set-off, cross-claim or counterclaim on which the defendant may be entitled to rely.”

15.  It is trite that the Court must be satisfied that if the claim were to go to trial, then, on the material before the judge at the time of the application for interim payment, the plaintiff would succeed in his claim, and would obtain a substantial amount of damages; the court must be satisfied on the balance of probabilities, and need not be satisfied beyond reasonable doubt. However, it is insufficient that the plaintiff is likely to succeed. The court must be satisfied that the defendant has no arguable defence or that there are sufficient doubts regarding the genuineness of the defence, so that the court would not grant the defendant unconditional leave to defend in a summary judgment application. The test is essentially the same as that for granting conditional leave to defend, namely, whether the defence can be said to be shadowy. See Hong Kong Civil Procedure 2020, vol. 1, §29/11/1 at p. 795; Hollywood Palace Co Ltd v Trans-Global Hong Kong Investment Ltd [2011] 1 HKLRD 833 at 838-839, §§16-18.

16.  In addition, the Court should read Order 29, rules 11 and 12 together and ask the single question whether the application fulfils the requirements of those rules as a whole rather than considering separately and exclusively the applicant’s entitlement under each rule (Ho Kuen Fai v Chun Wo Construction & Engineering co Ltd, HCA1790/2007 (7 August 2008, unreported), §§29-31).

E.  ANALYSIS

17.  What is in issue is the purpose of the First and Second Sums. The plaintiff’s case is simple and straightforward, and is supported by the contemporaneous emails and bank records. In contrast, for the following reasons, I take the view that the defendants’ defence is, to say the least, shadowy.

18.  First, there is no document whatsoever supporting the existence of the alleged 1^st or 2^nd Loan Retrieval Agreements, or the 1^st Defendant Loan Arrangement.

19.  Second, the defendants’ alleged agreements are contradicted by the contemporaneous emails produced by the plaintiff, which stated clearly the purpose of the 1^st and 2^nd Sums.

20.  Third, the defendants’ alleged agreements are lacking in particulars. They have not stated precisely when, where and how they were made.

21.  Fourth, the defendants’ alleged agreements were inherently improbable. It is clear that in May 2011, the JV was ongoing and in need of funds from time to time. It is inconceivable why Target Well and the 2^nd defendant would have seen fit to agree on the return of a substantial part of the shareholders’ loans at that point of time.

22.  Fifth, if it was intended that the same amount should be returned to the two shareholders respectively, the most natural and convenient way should be for the plaintiff to return two separate sums to them separately. It is difficult to understand why the plaintiff would have to pay the whole sum to the 1^st defendant first, and then for the 1^st defendant to return half of that sum to Target Well (or Mr Ng and Mr Choi).

23.  Sixth, there is no evidence that the 1^st defendant had in fact paid over half of the sums returned from the plaintiff to Target Well (or Mr Ng and Mr Choi).

24.  Seventh, the 1^st defendant’s claim that he had repaid RMB¥20million to the plaintiff is contradicted by the contemporaneous emails and bank records. In an email dated 4 March 2012, the 1^st defendant was requested to inject a sum of HK$ equivalent to RMB¥20 million as contribution to the issued capital of the JV Company. There was another email dated 16 May 2012 in which Mr Ng asked the 1^st defendant to make payment by 23 May 2012 due to the urgency of the matter. According to a transfer advice issued by Bank SinoPac on 21 May 2012, the 2^nd defendant transferred HK$11,850,015.00 to the plaintiff “for investment”. In an email dated 23 May 2012, the 1^st defendant’s assistant, Ida, informed the parties that the sum of HK$11,850,000, described as an investment (投資款項), had been transferred into the said bank account on 21 May 2012. According to another transfer advice issued by Bank SinoPac on 7 June 2012, the 2^nd defendant transferred another sum of HK$12,000,015.00 to the plaintiff “for investment”. In an email dated 7 June 2012, Ida informed the parties that the sum of HK$12,000,000.00, described as the second instalment of the investment (第二筆投資款項), had been transferred into the bank account on that day. These two sums added up to HK$23.85 million, which was equivalent to RMB¥20 million. The said documents show clearly that they were not repayment of any loan at all.

25.  The 1^st defendant also contends that it would be unlawful under the Mainland law for him to transfer monies from Hong Kong (as requested by the plaintiff) to the Mainland without the approval of the State Administration of Foreign Exchange. First, no such defence has been pleaded in the Defence. Second, there is no evidence that any unlawful act under the Mainland law has in fact been committed by anybody. Apparently, the 1^st defendant is trying to say that it was unlikely that the parties would agree to do something which would be unlawful. However, on the 1^st defendant’s own case, he and his associates managed to lend RMB¥33 million in their own names to the JV Company without any apparent difficulty. If there was any genuine difficulty, one would have thought that the 1^st defendant would raise such concern there and then. There is no evidence that he had done so.

26.  The next question concerns the legal consequences in case the plaintiff’ case would succeed at trial. In the instructions given to his Mainland lawyer as stated on p. 2 of the legal opinion of S & D Partners dated 15 November 2019, the 1^st defendant admitted that he and his associates paid RMB¥3million on 18 May 2011 and RMB¥30million on 14 September 2011 to the JV Company.  The 1^st and 2^nd Sums were paid to the defendants on 23 May 2011 and 14 September 2011 respectively.  In my view, the 1^st and 2^nd Sums were intended to reimburse the 1^st defendant in HK$ equivalent in return for the 1^st defendant’s arranging the transfer of RMB¥33million on behalf of the plaintiff to the JV Company. When, on the 1^st defendant’s own case, he had not in fact advanced RMB¥33million to the JV Company on behalf of the plaintiff, there is no conceivable reason for the defendants to keep the 1^st and 2^nd Sums. The plaintiff has a clear case to claim for the return of the 1^st and 2^nd Sums in restitution on the ground of unjust enrichment. In Shanghai Tongji Science & Technology Industrial Co Ltd v Casil Clearing Ltd (2004) 7 HKCFAR 79 at §67, Ribeiro PJ held that a useful framework for approaching such claims involves asking four questions: (a) was the defendant enriched? (b) was the enrichment at the plaintiff’s expense? (c) was the enrichment unjust? (d) are any of the defences applicable?. The defendants have been enriched at the plaintiff’s expense by receiving the 1^st and 2^nd Sums. The enrichment was unjust as the Sums had not been used for the intended purpose; and there was no other reason justifying the defendants’ receipt and retention of those sums. This was a case of total failure of consideration; “consideration” in the context of a restitutionary claim is the “basis or purpose” of the payment (Shanghai Tongji Science & Technology Industrial Co Ltd v Casil Clearing Ltd (2004) 7 HKCFAR 79 at §79). The defendants have not advanced any arguable applicable defence to such claim. It follows that the plaintiff should, at least, be entitled to the return of the 1^st and 2^nd Sums, leaving aside interests on those sums and other remedies that it may have in equity. It is unnecessary for me to consider whether the plaintiff’s claim may succeed on any other legal basis.

27.  For these reasons, I am satisfied that if the action proceeded to trial, the plaintiff would obtain judgment against the 1^st, 2^nd and 6^th defendants for a substantial sum of money i.e. an amount equivalent to the 1^st and 2^nd Sums. I am also satisfied that this would be an appropriate case to exercise the Court’s discretion to order interim payment. As the defence is, to say the least, shadowy; and the defendants have not pleaded any set-off, cross-claim or counterclaim, I take the view that it is fair to require the defendants to make interim payment representing the whole of the 1^st and 2^nd Sums.

F.  CONCLUSION AND ORDER

28.  For the above reasons, I shall allow the plaintiff’s appeal and set aside the Master’s order. An order for interim payment should specify to whom the payment is to be made and fix a time for payment; normally payment is to the plaintiff (Order 29, rule 13(1), RHC; Hong Kong Civil Procedure 2020, vol. 1, §29/11/8 at p. 797). I cannot see, and the defendants have not suggested, any reason why the Court should depart from the normal rule that the interim payment should be paid to the plaintiff. In the plaintiff’s summons, the plaintiff asks for the interim payment to be paid within 21 days. Having regard to the size of the interim payment, I shall give 90 days (around 3 months) to the defendants to make the payment.

29.  Accordingly, I order that:

(a)  The 1^st, 2^nd and 6^th defendants shall make interim payment in the sum of HK$3,580,380.00 to the plaintiff within 90 days; and

(b) The 1^st and 2^nd defendants shall make interim payment in the sum of US$4,728,132.00 to the plaintiff within 90 days.

30.  I also make a costs order nisi that the costs of and incidental to the plaintiff’s summons including the costs of the hearing before the Master and this hearing shall be paid by the 1^st, 2^nd and 6^th defendants to the plaintiff in any event to be taxed if not agreed.