UNIFY S.R.O. (formerly known as SIEMENS ENTERPRISE COMMUNICATION S.R.O.) v. ARIEL TRADING LTD

HCA 1881/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1881 OF 2013

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R U L I N G   O N   C O S T S

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Introduction

1.  This is an application for costs by the defendant against the plaintiff after discharge of a mareva injunction.

Background

2.  At all material times, the plaintiff (“P”) is a company incorporated in the Czech Republic carrying on business in the communications and information technology areas and is part of the Siemens Enterprise Communications Group (“SEC Group”).

3.  The defendant (“D”) is a limited liability company incorporated in Hong Kong on 25 June 2003, and its majority shareholder is one Ariel Baruch Frydman (“Frydman”), holding 9,999 issued shares out of 10,000, who is one of 2 directors.

4.  According to P, its Chief Financial Officer, a Tomas Hajek (“Hajek”), received a telephone call on 28 August 2013 from a person impersonating himself as the President and CEO of a company within the SEC Group, as a result of which a sum of €650,000 was transferred to the account of a company a Zhong Qingbao Trade Co Limited (“Zhong Qingbao”) at Bank of China (Hong Kong) Limited in Hong Kong (“BOC Account”) on the same day. 

5.  Hajek later found out that the caller was fictitious and an imposter and said P was the victim of a fraud (“Alleged Fraud”). Upon discovery, P took urgent steps to protect its position including immediately reporting the matter to the Czech police and requesting BOC to cancel the transfer, which was too late.

6.  On 5 September 2013, P applied for and obtained a mareva injunction against Zhong Qingbao and on the following day, issued the writ against Zhong Qingbao in another action HCA 1684/2013.  The mareva injunction was later continued on 13 September 2013 in the absence of Zhong Qingbao, and on that day, P also obtained a non-party discovery order against BOC. 

7.  In compliance with the discovery order, BOC provided P with the Financial History Transaction List and the Daily Activity List in relation to the BOC Account.  From a review of those documents, P discovered that almost the entire €650,000 which was credited by P and received by Zhong Qingbao in the BOC Account  at about 2:30pm on 29 August 2013, had been transferred out of the BOC Account by Zhong Qingbao in 6 separate remittances on 29 and 30 August 2013. Thus, by 30 August 2013, the sum of €650,000 had been dissipated.

8.  Of this, a total sum of €231,210 (“Relevant Sum”), were remitted, by two sums, to D’s account HSBC in Hong Kong (“HSBC Account”). 

9.  P issued the writ in the present action on 3 October 2013 against D and at about the same time of the issue, obtained a mareva injunction against D on ex parte basis (“Injunction”).  Under the exceptions, D was allowed HK$5,000 per week on ordinary business expenses and HK$25,000 in total on legal representation.  The ex parte order was later continued by DHCJ Seagroatt on the return date 11 October 2013 subject to variation, namely the allowance for legal representation being varied to HK$60,000 (“Continuation Order”).

10.  On 17 October 2013,  Frydman filed an affidavit on behalf of D to comply with the disclosure order contained in the Injunction (“1^st Affidavit”), and D’s assets as at 17 October 2013 were disclosed to be:

(i) HK$ 176,184.20 held in the HSBC account;

(ii) Unsold stocks (metal scrap) stored in Tianjin or Israel with an estimated value of approximately US$ 163,500.

11.  Frydman further deposed in his 1^st Affidavit in relation the Relevant Sum received by D in the HSBC Account, a sum of €195,000 had been paid out to D’s metal scrap supplier Elite Group Inc Limited (“Elite”) in Hong Kong and €10,400 (plus USD$18,000) to another metal scrap supplier Arimetals Ltd in Israel (“Arimetals”) both in August 2013, with the balance or its equivalent kept in the HSBC Account.

12.  P filed its statement of claim 30 October 2013, alleging that D participated in the Alleged Fraud and/or was used as a vehicle and had knowingly received the Relevant Sum, and seeking, among other things, a declaration that D was liable to account to P the Relevant Sum and that D was holding the Relevant Sum on trust for P.

13.  D filed a defence and counterclaim on 11 December 2013.  D denied any participation in the Alleged Fraud.  According to D, he received the Relevant Sum from its customer Zhong Qingbao but said it was in the course of a genuine business transaction without any prior knowledge and/notice of the Alleged Fraud.  D said it had an active and genuine business and it was normal for D to have large deposits and withdrawals from the HSBC Account.  D further counterclaimed damages as a result of the Injunction Order, interest and costs. 

14.  P filed its reply and defence to counterclaim on 8 January 2014.

15.  There were no further steps taken by the parties to prosecute the action for about 3 months.

16.  On 4 April 2014, D issued a summons seeking, among other things, the discharge of the Injunction and the Continuation Order, and for enforcement of the cross-undertaking as to damages and an enquiry relating thereto (“D’s Summons”).  Frydman had filed an affidavit in support thereof (“2^nd Affidavit”).  Subsequently, after exchange of correspondence between the parties, on 10 April 2014, by consent, both orders were discharged, and D’s application for enforcement of the cross-undertaking as to damages and enquiry was withdrawn[1].  The only issue remaining was costs which was adjourned for argument and this is now the matter before this court.

17.  In D’s Summons, the order sought was for P to pay D forthwith the costs of and incidental to the Injunction and the Continuation Order, including all costs previously reserved and D’s Summons, such costs to be taxed if not agreed.

18.  D’s position was that the Injunction ought to be discharged on the merits and therefore P should pay D the costs of and occasioned by the Injunction forthwith.

No real risk of dissipation

19.  D’s case on merits was based mainly on that no real risk of dissipation had been be shown by P in applying for the Injunction.

20.  As submitted by D’s Counsel, Mr Wong, it is trite that to justify the grant of a mareva injunction, P must establish that there is a real risk that D might dissipate its assets to frustrate a potential judgment against it.

21.  Mr Wong had also referred to the some of the principles on establishing a real risk of dissipation in support of a Mareva application which can be seen from Eastman Chemical Ltd v Heyro Chemical Co Ltd [2012] 3 HKLRD 307, as follows[2]:-

a. The burden is on the plaintiff to adduce “solid evidence” of the risk of dissipation to justify a very serious infringement on the rights and liberties of the defendant.

b. When considering whether there was an unacceptably low commercial morality to infer a risk of dissipation of assets, the court should scrutinise the evidence with care and should not too readily infer a real risk of dissipation from the defendant’s conduct or commercial morality.

c. The plaintiff cannot beforehand prevent the defendant from disposing of his assets merely because he fears that there will be nothing against which to enforce his judgment nor can he be given a secured position against other creditors.

d. The plaintiff is required to show that at least objectively, the effect of the defendant’s conduct would be to frustrate the enforcement of any judgment.  The conduct in question must be unjustifiable.  There must be a risk that the asset will be used otherwise than for normal and proper commercial purposes.

22.  The evidence laid before this court at the time of P seeking the Injunction was contained in the affirmation of P’s solicitor Leung Chu Ming Danny (“Mr Leung”) filed on 3 October 2013.

23.  Mr Wong submitted that from Mr Leung’s Affirmation, P relied entirely on “robust inferences” to be drawn merely from the fact that the remittances of the Relevant Sum into D’s HSBC Account was made a day after the Alleged Fraud took place and that no information on D’s business was readily available.  In Mr Leung’s affirmation, P had admitted that at that stage it did not know whether D had a legitimate basis or entitlement for the receipt of the Relevant Sum, or whether it had an established business history apart from the fact that it was incorporated in 2003[3].

24.  Mr Wong complained that no attempt was made by P to independently establish a real risk of dissipation by D, whether by reference to its business practice, history, personnel, or background.  On the evidence, there was no connection between D and Zhong Qingbao, apart from the transfer of the Relevant Sum into the HSBC Account held by D.

25.  Mr Wong further submitted that D had subsequently adduced “cogent evidence” of its business dealings (including its genuine transaction with Zhong Qingbao) which would put to bed any allegation of a risk of dissipation, and that according to Frydman’s 2^nd Affidavit, the transfer of the Relevant Sum was made as payment for a sale of scrap metal by D to Zhong Qingbao transacted on 27 August 2013, which was before P had transferred the €650,000 to Zhong Qingbao.

26.  The evidence Mr Wong submitted that D had produced included the following:

a. D has been in the business of trading general merchandise including metal and other scrap items since its incorporation in 2003[4].

b. D has substantial business operations (with sales of approx USD 1m each year) between from 2010 to 2013 with no history of default and a sound business reputation[5].

c. The Relevant Sum was received as payment for a sale of scrap metal by D to Zhong Qingbao transacted on 27 August 2013 (i.e. before the date on which P paid €650,000 to Zhong Qingbao)[6].

d. The proceeds of the sale were used to pay D’s suppliers Elite and Arimetals, from which the scrap metal sold was sourced, on 30 August 2013 and 2 September 2013.  The scrap metal sold was delivered by D’s suppliers to Shanghai and Zhong Qingbao had taken delivery of the goods on 3 September 2013[7].

e. The above matters are supported by documentary evidence including invoices, delivery notes, bank statements and audited financial statements.[8]

f. Crucially, after the date of the deposit of the Relevant Sum on 30 August 2013 and subsequent payments Elite and Arimetals, substantial sums were then deposited into D’s HSBC Account in D’s usual course of business. 

g. Further, the pattern of transactions by D are such that substantial balance remains in D’s account for extended periods of time.

27.  Mr Wong had pointed out that the Relevant Sum was received by D in the HSBC Account by 2 sums on 30 August 2013, which was a Friday, and only a sum of €10,400 was withdrawn that day, and the remaining €195,000 was only transferred out on following Monday 2 September 2013.  This showed that D had no intention to dissipate the Relevant Sum, as otherwise, D would have had the entire Relevant Sum transferred out immediately on the Friday, and would not have left the larger amount  over the weekend.

Discussion

28.  I note, first of all, there was no application by D to discharge the Injunction on the return date, or oppose the Continuation Order, and D only sought a variation to the amount of legal costs to be increased from HK$25,000 to HK$60,000.  In fact, D’s Summons was only taken out about 6 months after the Injunction, at about the time when all the balance in the HSBC Account had been exhausted.

29.  Mr Wong had submitted that as the HSBC Account was frozen, no further trading was possible.  If D had indeed been in active business trading immediately prior to the Injunction, one would have thought an application for discharge, or at least an attempt to do so, would have been made on the return date, or soon thereafter.  One would have thought those audited financial statements produced by Frydman could have been obtained from its auditors and bank statements would be readily obtainable from the Company Secretary to which they were sent every month, or directly by Frydman online from HSBC.

30.  D’s 2012 audited financial statements indicated that for the year ended 31 March 2012, that there had been a substantial drop in revenue for that year, which was US$1,027,219 compared to US$3,787,778 in the year ended 31 March 2011, and there was a net loss of US$6,359 for the year ended 31 March 2012.  Although there was a slight improvement in that there was a profit the year ended 31 March 2013, the revenue was reduced to US$961,744 profit was only US$10,218.    

31.  More information can be gleaned from the bank statements of the HSBC Account.  The average balance on the monthly statement date was about HK$80,000 from 14 April 2011 to 14 March 2012.  The average balance on the monthly statement date was HK$120,000 from 14 April 2012 to 14 March 2013.  The average had only increased mainly by the large deposits in July and August 2012, which were withdrawn very quickly if not within the same day.   

32.  As for the year 2013, the monthly average on the statement date for 7 months from 14 January 2013 until and including 14 August 2013 was only about HK$56,000 per month.  There was a time deposit, but only an amount of US$4,100 throughout.

33.  The bank statements were consolidated statements of the HKD current and savings accounts, and also the foreign currency savings account.  The HKD accounts were mainly used to service a credit card and a bank loan repayment.  Up until 14 August 2013, most large deposits and withdrawals were in USD in the USD foreign currency savings account, save for 3 small amounts of  2 of EUR 950 and 1 of EUR 1,783 from 14 April 2011 until 14 August 2013, according to the tables set out by Frydman[9].

34.  In fact, the balance on 14 September 2013 of HK$7,888,848.30 really stood out since 14 April 2011 as being the highest, and, to say the least, the transactions in September 2013 would appear to be unusual. Further, unlike previous large transactions, the Relevant Sum and the subsequent withdrawals were in EURO currency.

35.  In Mr Leung’s affirmation in support of P’s application for the Injunction, he had exhibited therein a copy of an affidavit of Johannes Schulte made on behalf of P about the Alleged Fraud.  What Mr Leung had said about the real risk of dissipation or urgency was that the misappropriated funds had been rapidly and fully dissipated from the BOC Account in a total of 6 remittances, including 3 remittances totaling €400,000 that were paid into accounts at HSBC, and that there was a real risk that such funds would further be dissipated by the “perpetrators” with a view to putting those funds beyond the reach of P.  Included in the €400,000 was the Relevant Sum paid into the HSBC Account in the name of D.

36.  Mr Leung had set out in his affirmation a company search of D, which revealed, among other information, that the authorized and issued share capital was HK$10,000 divided into 10,000 shares of HK$1 each, and that its registered office was an address at Flat D, 11 floor, Liberty Mansion, 26E Jordan Road, Yau Ma Tei in Kowloon (“Registered Address”). The Company Secretary was one K T Services Limited of an address at Sun Fai Commercial Centre, on Reclamation Street in Mongkok, Kowloon (“KT Address”).

37.  The service clerk from P’s solicitors had personally attended the Registered Address on 30 September 2013 and took photographs of the front door, which were exhibited.  The clerk said he had knocked on the door a few times but there was no answer.  As seen on the photographs, D’s name was displayed on a small piece of white paper and there were two other company names (FRENCHW INES.H.K and Moonsky Star Limited) which appeared on the front door of the Registered Address.

38.  It did not appear from the photographs of the front door of D’s Registered Address that D had an actual office conducting business at that address.  The addresses of Frydman and the other shareholder and director of D on the annual return were both in Haifa, Israel.

39.  The bank statements of the HSBC Account showed D’s address to be the KT Address, and not the Registered Address.

40.  There was nothing in the audited accounts to show that D had any rental expenses, only hotel and accommodation and overseas travelling expenses.  There were also no staff expenses. 

41.  From the evidence so far, D had no assets in Hong Kong, save the balance in the HSBC Account of about HK$176,000 on the date of the Injunction, which even that has by now depleted.

42.  I have earlier pointed out the month of September 2013 was an unusual month.  On a detailed scrutiny, it was only during the period of about 2 weeks, from about 10 September 2013 until 25 September 2013, that there were large/significant deposits, prior to the HSBC Account being frozen, including those 4 large USD deposits set out by Frydman in his 2^nd Affirmation.  Although the total balance in the HSBC Account was stated to be almost HK$7.9m on 14 September 2013, it had been reduced to HK$176,000 on the date of the Injunction, ie 3 October 2013.  There were 4 large USD transactions on 10 and 11 September 2013, as follows:

(i)	604,261.08	10.09.13
(ii)	499,998.06	10.09.13
(iii)	424,219.06	10.09.13
(iv)	664,875.06	11.09.13

43.  On 13 September 2013, there was balance of USD$1,003, $481.89 and by 24 September 2013, the balance was already reduced to USD$24,423.09.

44.  Frydman had produced 8 invoices of consecutive invoice numbers 7234-7241 from 27 April 2013 to 18 September 2013, and other alleged supplier’s invoices, including those from Elite and Arimetals from 1 April 2013 to 30 September 2013 in “ABF-8”, with no confirmation of having been faxed, or delivery, or receipt.  Among these was one invoice dated 27 August 2013 allegedly sent to Zhong Qingbao by P for €231,310 (“Relevant Invoice”)[10].

45.  Frydman had also produced emails with someone by the name of “Olash” allegedly of Zhong Qingbao, from 16 October 2013 to 28 October 2013.

46.  There were no other evidence of communications prior to 16 October 2013 between P and this Olash/Zhong Qingbao save as above mentioned.

47.  According to Frydman, he received a telephone call from Olash in mid August 2013, and alleged arrangements were reached over telephone call in relation to supplying Zhong Qingbao goods.  According to Frydman, he had mistakenly thought Zhong Qingbao was another company he had previous business dealings.  Anyway, no telephone records from any telephone companies were produced by Frydman.

48.  There were other discrepancies as noted in Mr Leung’s submissions in Frydman’s 2^nd Affidavit including the following:

(i) The quantity and unit price stated on the Relevant Invoice was 30 tons @ unit price €7,700, and the total amount should have been €231,000, and yet the invoiced amount was higher, at  €231,310;

(ii) On the invoice no 1109 from Elite to D, the quantity and unit price were stated to be 24.5 tons @ €6,525 and the total amount should have been €159,862.50, and yet the invoice amount was much higher, at €195,712;

(iii) However, the actual payment from D to Elite, as seen on the bank statement was only €195, 000;

(iv) The quantity of metal scrap stated in the invoice issued by Yixin Distribution Limited dated 26 August 2013 was 70.5 tons while on the delivery note dated 3 September 2013 was 70.65 tons to Zhong Qingbao, and the description was “copper scrap and other metal scraps”, where on the Relevant Invoice was only 30 tons of copper scrap;

(v) According to the email from Frydman to Olash on 17 October 2013, Frydman referred to “our first deal (the one for EUR 400,000 from August)”, and that was not the same amount as the Relevant Sum.

(vi) No explanation as to why the Relevant Sum was made by two separate tranches within a matter of two minutes, and the 1^st tranche was exactly 10% and the 2^nd tranche was 90% of the Relevant Sum.

49.  Mr Leung had submitted that notwithstanding all the above discrepancies, P had agreed to the discharge of the Injunction as by April 2014, the frozen funds in the HSBC Account had almost been exhausted by the legitimate business and legal expenses allowed under the Injunction, and P agreed to the discharge on practical reasons.

50.  It may well have been the case that D has been carrying out normal business trading for years, although it seems that such business trading has reduced greatly in the past 3 years.  The burden is on D to show that the Injunction and the Continuation Order would have been discharged by this court on merits.  Having considered Frydman’s 2^nd Affidavit, I find it throws up even more queries, and even without evidence from P, it did not seem likely that the Injunction and the Continuation Order would have been discharged on merits, had it not been by consent.  In the circumstances, D’s application for costs must fail.

Conclusion

51.  Mr Leung had initially sought costs of the Injunction Order, the Continuation Order, the Consent Order, and also the costs hearing, although he later seemed to propose costs of the Injunction Order and the Continuation Order to be P’s costs in the cause.  Costs are in the discretion of the court and in my view, the appropriate order would be costs of the Injunction Order and the Continuation Order to be P’s costs in the cause.  Further, as the parties both consented to the discharge of in the Consent Order, I am of the view that there should be no order as to costs of the issue of D’s Summons and the Consent Order.  As for costs hearing, as D has not succeeded in its application, D should pay P’s costs of the costs hearing, such costs to be summarily assessed and paid within 7 days after assessment.  P is to lodge its statement of costs within 7 days, and D is to lodge its opposition within 7 days thereafter.

[1] B:169

[2] At 314-315

[3] Para 19, B:5

[4] §4 Frydman’s 2^nd Affirmation [74]

[5] §§6-8 Frydman’s 2^nd Affirmation [76-83]

[6] §9 Frydman’s 2^nd Affirmation [83]

[7] §§11-14 Frydman’s 2^nd Affirmation B:85-87

[8] §5 Frydman’s 2^nd Affirmation, B:74

[9] Paras 6-10, B: 76-85

[10] B:118