Fraud exception to summary judgment - court's approach hardens

Introduction

As noted in a previous update (for further details please see "Summary judgment and fraud exception"), the courts in Hong Kong have traditionally held that the so-called 'fraud exception' to the jurisdiction to grant summary judgment is to be construed widely. Therefore, any allegation of dishonesty by a plaintiff against a defendant is caught by the exception, be it an allegation in a formal pleaded case, sworn statement or supporting legal submission. This was recently confirmed in an interesting decision handed down since the previous update.(1) In this case, the judge held that although the plaintiffs had not formally pleaded fraud or dishonesty, an allegation of a breach of trust had been made against the defendant that in substance amounted to an allegation of intentional or reckless conduct done with the purpose of deceiving. Therefore, the court had no jurisdiction to grant summary judgment.

Recent development

In Re Cheung Choi Fui a large group of plaintiffs residing in mainland China claimed in a number of consolidated actions to be beneficially entitled to a large number of shares in a Hong Kong company, which in turn held a significant stake in a Cayman company whose shares are listed in Hong Kong. The plaintiffs claimed that the defendant held the shares as their trustee pursuant to a trust in Hong Kong. An issue (among many others in a large-scale piece of litigation) arose as to whether the defendant held the shares as trustee for the plaintiffs (as beneficial owners) or whether (for example) the plaintiffs were only entitled to dividends on the shares pursuant to certain arrangements in the British Virgin Islands.

In dismissing the plaintiffs' application for summary judgment, the judge commented that:

"Although a breach of trust does not necessarily involve dishonesty, in the context of the present claims, it seems to me obvious that the plaintiffs are complaining that the 1st defendant acted dishonestly in seeking to deprive them of their beneficial interests in the [CSI] shares."(2)

In short, the judge considered that the plaintiffs' allegation that the defendant transferred their beneficial interests in the shares to certain offshore entities without their consent amounted in substance to an allegation of dishonesty, such that summary judgment was not available. In reaching his decision, the judge appears to have taken into account all relevant documents, including not only court documents, but also the plaintiffs' original letter of complaint.

Comment

As noted in the previous update, there is some debate in judicial and practitioner circles in Hong Kong as to whether the fraud exception to summary judgment should be maintained or done away with by amendment to the court rules.(3)

Even if the fraud exception is done away with, it is unlikely that this will result in summary judgment being granted in complex cases in which allegations of dishonesty are made by a plaintiff against a defendant. For example, given the complexity of the facts and issues in the case at hand, it is clear that the judge would not have granted summary judgment even if he had decided that he had jurisdiction to do so.(4)

However, the abolition of the fraud exception from the court rules could be a symbolic step forward in an environment of ever-more sophisticated scams being perpetrated in Hong Kong and where it has traditionally been difficult to obtain summary judgment in all but the most straightforward cases.

For further information on this topic please contact Warren Ganesh or David Smyth at Smyth & Co in association with RPC by telephone (+852 2216 7000) or email ([email protected] or [email protected]). The RPC website can be accessed at www.rpc.co.uk.

Endnotes

(1) Re Cheung Choi Fui [2016] HKEC 936, HCA 1661/2015 (and other consolidated actions), April 26 2016.

(2) Supra note 1, at paragraph 17. Not all the plaintiffs joined in the application for summary judgment.

(3) "Summary judgment and fraud exception", March 29 2016 (final paragraph). Rules of the High Court, Order 14 Rule 1(2) – for example, deletion of "sub-rule (b)".

(4) Supra note 1, at paragraph 24.

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