Case: China Medical Technologies, Inc (in liq) v Wu Xiaodong & Ors [2026] HKCFI 276
Case Highlights
No Knowledge of Breach Required: The Court of First Instance held that a defendant need not have knowledge of the breach of trust or fiduciary duty to be liable for dishonest assistance.
Minimum Content of Knowledge: Without deciding whether there is any minimum knowledge requirement for dishonest assistance, the Court noted the English Court of Appeal’s recent refusal to complicate the two-stage test for dishonesty by introducing a minimum content of knowledge threshold.
Limitation in Fraud Cases: Under s.20(1)(a) of the Limitation Ordinance (Cap. 347), no limitation period applies to a company director’s fraudulent breaches of trust. A plaintiff may also postpone the limitation period for (i) claims based upon the defendant’s fraud, and (ii) cases involving the deliberate concealment of facts by the defendants, by relying on s.26(1)(a) and s.26(1)(b), respectively.
Discovery of Fraud by Liquidators: For limitation purposes, a company in liquidation should not be treated as if it were the same company while it was in active business under its former management, thus reflecting the practical differences as to how investigations are conducted in trading and liquidated companies.
Background
China Medical Technologies, Inc (“CMED“) was a Cayman Islands-incorporated company which was listed on the NASDAQ until its collapse in 2012. Between 2005 and 2010, CMED raised US$631 million from international capital markets through its equity and debt offerings.
After CMED was wound up, the liquidators discovered that US$521.8 million had been misappropriated from the company and its subsidiary. The funds were stolen through transactions that were presented as legitimate purchases of medical diagnostic technologies from an unrelated third party, but were in reality undisclosed related party transactions at a gross overvalue, designed to allow members of CMED’s management to steal the funds paid in the transactions.
The stolen funds were later paid out to various recipients, including individuals and entities associated with the fraudulent directors, as part of a money laundering process. The liquidators commenced proceedings in Hong Kong against multiple defendants, seeking recovery of the misappropriated funds through claims of breach of fiduciary duty, unlawful means conspiracy, fraudulent trading, dishonest assistance, knowing receipt, and unjust enrichment.
Some of the defendants raised limitation defences, arguing that the claims to recover certain payments against them were time-barred.
The Decision
The Honourable Mr Justice Eugene Fung found in favour of the Plaintiffs against each of the defendants, providing clarification as to the level of knowledge required to establish a claim in dishonest assistance and when limitation periods begin to run in cases involving fraud.
- The Knowledge Requirement for Dishonest Assistance
Knowledge of the Breach Not Required
The Court held that, in a dishonest assistance claim, a defendant need not have knowledge of the breach of trust or fiduciary duty before he/she can be found to be dishonest. This is an important clarification of the law in Hong Kong, and puts to bed the suggestion that there was any inconsistency in the approach taken in previous cases.
The 6th Defendant specifically relied on the decision in Clark Quantum Kent v Hai Tin Limited [2021] HKCA 1846 to contend that a defendant must have knowledge of the breach of trust or duty before he/she can be found to be dishonest. The Court rejected this, holding that Barma JA’s decision could not be taken as authority for such a proposition, and merely clarifies that the “dishonesty” in dishonest assistance must relate to the assistance of the breach, in the sense that, “generalised dishonesty” independent of the assistance or breach of trust is insufficient.
Minimum Content of Knowledge
While the Court found it unnecessary to decide whether a minimum content of knowledge is required in dishonest assistance claims, it provided helpful guidance by highlighting the English Court of Appeal’s view in Group Seven Ltd v Nasir [2020] Ch 129 that “the simplicity of the two-stage test for dishonesty… should not be complicated by the introduction, as a matter of law, of a minimum content of knowledge which must be satisfied” (at [104]), and acknowledging the force in that view.
Holistic Approach to Dishonesty
Relying on Lord Millett’s observation in Three Rivers DC v Bank of England (No 3) [2003] 2 AC 1 that the court may not infer dishonesty from pleaded facts that are consistent with honesty, the 6th Defendant submitted that the Court should look at each of the pleaded facts individually and ask if each of them is consistent with honesty or innocence.
However, the Court rejected this and held that the correct approach is to examine all the matters pleaded by the Plaintiffs holistically and apply the two-stage test in Ivey v Genting Casinos (UK) Ltd [2018] AC 391 to ascertain whether the inference of dishonesty is justified. Ultimately, the question for the Court to ask is whether an inference of dishonesty is more likely than one of innocence or negligence based on the pleaded matters and the evidence.
- Limitation Periods in Fraud Cases
Section 20(1)(a), Limitation Ordinance – No Limitation for Fraudulent Breach of Trust
Pursuant to s.20(1)(a), no limitation period applies to actions for “fraud or fraudulent breach of trust to which the trustee was party or privy”. Following Burnden Holdings (UK) Ltd v Fielding [2018] AC 857, a breach of fiduciary duty involving the misappropriation of the company’s assets is treated as a breach of trust. Applying Peconic Industrial Development Ltd v Lau Kwok Fai (2009) 12 HKCFAR 139, the Court affirmed that a director is treated as an express trustee for this purpose and no limitation period applies to their fraudulent breaches of trust. Accordingly, the Court found that the usual 6-year limitation period did not apply to the Plaintiffs’ claims against the 2nd Defendant for fraudulent breaches of fiduciary duties.
Section 26(1)(a), Limitation Ordinance – Postponement of Limitation Period for Claims Based on Fraud
Claims “based upon the fraud of the defendant”
The Court also considered s.26(1)(a), which postpones the limitation period for actions “based upon the fraud of the defendant”, in the context of other individual defendants. Following Beaman v ARTS Ltd [1949] 1 KB 550, the Court held that an action is based upon the fraud of the defendant if fraud is a “necessary allegation in order to constitute the cause of action”. This test is highly fact-specific, requiring the Court to examine how the fraud allegation is pleaded and proved by the plaintiff and determine whether the particular facts of the case fall within the wording and intendment of s.26(1)(a).
On the facts:
- Unlawful means conspiracy: the unlawful acts pleaded included acts to deceive or defraud the Plaintiffs, hence the claim for conspiracy was found to be based upon the fraud of the defendant.
- Dishonest assistance: fraud is a necessary allegation to constitute the cause of action in dishonest assistance, and the defendants had evidently acted dishonestly in assisting the misappropriation of funds from the Plaintiffs. Accordingly, the Plaintiffs’ claims for dishonest assistance were based on the defendants’ fraud.
- Knowing receipt: the Plaintiffs’ claims for knowing receipt were based on the defendants’ dishonest receipts of the relevant funds, therefore such claims were based on the defendants’ fraud.
- Unjust enrichment: the Court held that the findings of dishonesty against certain defendants had no material relevance to the Plaintiffs’ claims for unjust enrichment, which were based on the defendants’ receipts of misappropriated funds in want of authority. As such, the claims for unjust enrichment were not based upon the fraud of the defendants. Nonetheless, s.26(1)(b) may also apply to postpone the limitation period in respect of the claims for unjust enrichment if there was deliberate concealment by the defendant (see below).
Discovery of the Fraud
Under s.26(1), the burden is on the plaintiff to establish that he could not have discovered the fraud without exceptional measure which he could not reasonably be expected to take. The Court adopted a pragmatic approach in determining when the company’s Liquidators could reasonably discover the fraud. Following OT Computers Ltd (in liq) v Infineon Technologies AG [2021] QB 1183 at [59], the Court recognised that “a claimant in administration or liquidation which is no longer carrying on business is not in a similar position to claimants which do continue actively in business”.
In this case, the Court considered the substantial obstacles faced by the Liquidators in obtaining information from the company’s former management and service providers. Given the obstructions to the Liquidators’ investigations, it was held that the Plaintiffs could not with reasonable diligence have discovered the fraud before the Liquidators discovered that the CFO of CMED (the 2nd Defendant) was on both sides of the fraudulent transactions.
Section 26(1)(b), Limitation Ordinance – Deliberate Concealment
The limitation period may also be postponed under s.26(1)(b) if the defendant deliberately concealed facts relevant to the Plaintiffs’ right of action. The Court observed that “concealment” encompasses “both active concealment and concealment by non-disclosure”. The applicable standard of proof is the balance of probabilities, and inferences may be drawn from the primary facts.
In the present case, the Court inferred that there had been deliberate concealment by the 5th Defendant, based on his active involvement in the fraud and conspiracy, and by the 13th Defendant, given the unreliable nature of her evidence.
Key Takeaways
This decision affirms the wide-ranging legal remedies available to companies when seeking the recovery of misappropriated funds from fraudulent directors and their accessories. It clarifies that:
- In a claim for dishonest assistance, knowledge of the breach of trust or fiduciary duty is not required by the defendant. Recent case law suggests that courts should be reluctant to complicate the two-stage dishonesty test by imposing a minimum content of knowledge requirement.
- Usual limitation periods may be disapplied or postponed in fraud cases by virtue of s.20(1)(a) (for fraudulent breaches of duty), s.26(1)(a) (for claims based upon the fraud of the defendant), and s.26(1)(b) (for cases where the defendant deliberately concealed information from the plaintiff) of the Limitation Ordinance. The test for whether a claim is based upon the defendant’s fraud under s.26(1)(a) is ultimately dependent on the particular facts and way in which the plaintiff has pleaded the facts.
Read the judgment here: https://legalref.judiciary.hk/lrs/common/ju/ju_frame.jsp?DIS=176391&currpage=T
Mr Charles Manzoni SC and Ms Cherry Xu appeared for the 1st to 3rd Plaintiffs.
The article is co-authored by Ms Cherry Xu of Des Voeux Chambers and Mr Jordan Moulds of Karas So LLP.
