Hong Kong Fraud Litigation: Piercing the Corporate Veil to Sue Directors
Fraud case Litigation in Hong Kong and Corporate Veil
In fraud litigation in Hong Kong, a common challenge is that a Hong Kong company involved in fraud, or directly receiving fraudulent funds, has transferred its assets away by the time victims initiate civil proceedings against it. Even if the lawsuit against the company is successful, victims often face the dilemma that the company has no assets available to enforce the judgment. What is the solution to address this issue?
Under the general principles of Hong Kong company law, a company is a separate legal entity. When the company becomes insolvent, creditors can only typically apply for the company’s liquidation. However, in the context of fraud involving a Hong Kong company, victims may have the opportunity to "pierce the corporate veil" and hold the directors personally liable for damages. Pursuing litigation against the company’s directors to hold them personally accountable offers a new direction for resolving the issue of a defendant company lacking enforceable assets in a fraud-related civil litigation.
Basis for Holding Directors Personally Liable: Dishonest Assistance
In fraud cases, if a Hong Kong company is involved in fraud — for instance, receiving fraudulent funds and transferring them without reasonable justification — the company is legally deemed to hold those funds as a trustee under a constructive trust. If the company’s directors dishonestly transfer the funds received by the company, they may be liable for dishonestly assisting the company in breaching its trust obligations, thereby becoming personally liable to compensate the victims. The directors can either be personally liable for dishonest assistance independently or jointly with the company’s liability for breaching its trust obligations.
The authoritative case establishing the personal liability of directors for dishonest assistance is Royal Brunei Airlines v Tan [1995] 2 AC 378, which set out two fundamental principles:
- A director’s dishonesty is sufficient to establish the liability for dishonest assistance independently, without requiring the company, as a corporate entity, to have engaged in fraud or dishonesty; and
- The standard for determining a director’s dishonesty is objective, not subjective. If the director’s conduct, as measured by the standards of an ordinary reasonable person, is deemed dishonest, liability can be established without proving his or her subjective fraudulent intent. (See Levin on Trust, 43-066)
Hong Kong Cases: Suing Directors’ Personal Liability for Dishonest Assistance in Fraud Cases
In Wavefront Trading Ltd v Po Sang Bank Ltd [HCA 3359/1997], the court adopted the legal principles from Royal Brunei Airlines as the standard for determining dishonest assistance and held that such decisions could not be made in summary judgment proceedings but required a full trial.
In NIKKODO (HK) LTD v LAM CHIU KAU & ANOTHER [HCA 9724 of 1997], the court applied the Royal Brunei Airlines principles, pierced the corporate veil, and held the company’s directors directly liable for a breach of contract (see judgment paragraphs 27–31).
In a typical fraud case DONGGUAN CITY LONG LIAN TRADING CO LTD v SO KIT & OTHERS [HCA 13667/1999], the court applied the Royal Brunei Airlines principles, pierced the veil of the company receiving the fraudulent funds, and held the company’s directors personally liable for damages (see judgment paragraphs 27–36). This legal principle was also cited in two other cases: Britestone Ltd v Cohome (HK) International Trade Co Ltd [HCMP 2928/2016] (paragraphs 45–59) and Ho Lai Ming v Chu Chik Leung & Another [DCCJ 2739/2003].
Conclusion
In civil litigation in Hong Kong to recover funds from fraud cases, if the fraudulent funds have been transferred to a Hong Kong company’s bank account and the company itself lacks enforceable assets, suing the personal liability of the company’s directors for dishonest assistance in breaching trust obligations does provide a new approach and pathway for asset recovery in such cases.
(Author: Bob Yan, principal solicitor of Yan Lawyers, Email: [email protected], WhatsApp: +852 51039249)
