CHINA ART BANK CO LTD v. XU ZHIQIANG

HCA 2543/2015

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2543 OF 2015

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AND

HCA 2178/2015

ACTION NO 2178 OF 2015

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DECISION

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A. INTRODUCTION

1.  On 1 June 2017, I handed down a decision[1] (“the Decision”) in these matters, whereby I ordered, inter alia, that:

(1) China Art’s summons dated 4 November 2015 to continue the Mareva injunction against Xu, granted by Mimmie Chan J on 2 November 2015 and continued (as varied) by L Chan J on 6 November 2015, be dismissed, save that I continued that injunction for 14 days so that China Art might decide what applications (if any) it would make in the meantime if it wanted to take the matter further.

(2) China Art and Feng to pay security for costs within 28 days in the sums of HK$500,000 and HK$320,000 respectively.  If no such payments were made, their respective actions against Xu were to be dismissed.

2.  No interim injunctive relief was obtained by China Art within the 14 days referred to in §1(1) above, or up to now.  Neither China Art nor Feng pay the security for costs ordered within 28 days of the Decision.  Judgments dismissing these actions were entered on 24 July 2017.

3.  By summons dated 15 June 2017, the plaintiffs apply for leave to appeal from orders set out in §1 above, with a draft Notice of Appeal annexed.  The summons also asks for the Mareva injunction be continued until the hearing of the appeal, and a stay of execution for the provision of security for costs.  Another summons, dated 6 July 2017, in identical form save as to the title to these proceedings, was also issued.

4.  In the draft Notice of Appeal, China Art asks the Court of Appeal to order that the Mareva injunction against Xu be continued until trial or further order.  The plaintiffs also ask that my orders for security for costs be set aside, with an order that they shall not be required to pay such security, or alternatively that they are only required to do so after Xu returns to Hong Kong, or alternatively for the quantum to be reduced.

5.  By a summons dated 19 July 2017, China Art applies for an order restraining Xu from removing his assets (in particular the two OCBC Wing Hang Bank accounts I referred to in the Decision) within the jurisdiction or otherwise putting them beyond its reach, up to HK$20,250,000, pending the hearing of the appeal if leave to appeal is granted by me, or for a period of 14 days if leave to appeal is not granted.  The injunction China Art asks for is a proprietary injunction, with the sums claimed by China Art being said to belong to it.

B. STAY AND DISMISSAL OF THE ACTIONS

6.  Mr Joseph Wong, counsel for Xu, submits that since the two actions have been dismissed, there is no need to hear the plaintiffs’ applications.  In any event, he submits, even if the dismissal of the actions is ignored, since the actions are stayed pending payment of security into court, the court is only entitled to hear applications to reconsider the stay itself, citing the determination of the Appeal Committee of the Court of Final Appeal in Sunchase International Group (China) Ltd v Vincor Group of Companies (Investment) Ltd (FAMV 21/2004, 22 February 2005).

7.  With respect, I disagree.  At §7 of the determination in Sunchase, Ribeiro PJ said:

“ There is no doubt that whenever an action is stayed, the court has power to reconsider that stay: whether to lift it, to change the terms on which it is granted, or otherwise.”

What the learned Permanent Judge did not say is that where an action is stayed, the court can only reconsider the stay and nothing else.  In particular, what the party against whom the stay is granted must be able to do is to make an application for leave to appeal against the order which directly or indirectly grants the stay, and to apply for all other related orders such as a stay pending appeal and interim reliefs to protect its position pending appeal (or an application for leave to appeal), so as not to render the right to appeal (or to apply for leave to appeal) nugatory.  And even though an appeal against the non-continuation of the Mareva injunction serves no purpose without the dismissal of the actions (by reason of the non-payment of the security for costs) being reversed on appeal, if I am to consider the application for leave to appeal against the orders for security for costs, in my judgment it is only right that the application for leave to appeal in relation to the Mareva injunction be entertained so that the Court of Appeal can deal with both matters should I grant leave.  If necessary, so as to allow the plaintiffs to be able to exercise their right to ask for leave to appeal and other related orders, I am prepared to lift the stay, if the objection for me to hear the present applications is that there is a stay in these actions.

8.  The fact that both actions have been dismissed by my Order of 1 June 2017 again cannot be a bar to the application for leave to appeal against the order which results in the dismissal, or for related orders such as a stay pending appeal and an injunction pending appeal, or otherwise a party whose action is dismissed is in effect being denied the right to appeal (or to apply for leave to appeal).  Mr Wong confirms that his objection is based only on the stay, and not on the dismissal, of the actions.

9.  I reject the objection on behalf of Xu based on the stay, and shall proceed to deal with the substantive applications. 

C. LEAVE TO APPEAL

C1. The threshold

10.  The parties agree that for leave to appeal to be granted, the plaintiffs must show a reasonable prospect of success or some other reason in the interests of justice why the appeal should be heard.  Reasonable prospects of success mean that the prospects of success must be “reasonable”, i.e. more than fanciful or just arguable, without having to be probable: SMSE v KL [2009] 4 HKLRD 125 at §17 per Le Pichon JA; Wynn Resorts (Macau) SA v Mong Henry (HCA 192/2009, 10 August 2009) at §§18 – 19 per Chu J (as she then was). 

11.  I note further that in so far as the proposed appeal is against any decision of mine which is discretionary in nature, what the plaintiffs have to show is that there is a reasonable prospect of them succeeding in showing at the appeal that my discretionary decisions should be set aside on the grounds as set out by Lord Diplock in Hadmor Productions Ltd v Hamilton [1983] 1 AC 191 at 220, which is too well-known for me to recite here.

12.  I shall proceed on the basis of the principles set out at §§10 – 11 above.

C2. Leave to appeal against security for costs

13.  I shall deal with the application for leave to appeal against my orders for security for costs first.

14.  In the draft Notice of Appeal, the plaintiffs argue that I was wrong in assessing the merits and the strength of the parties’ cases, with counsel for Xu conceding that the plaintiffs had shown sufficient merits.

15.  What Mr Wong had conceded before me was that the plaintiffs had shown sufficient merits for China Art’s application for a Mareva injunction not to be dismissed for lack of merits of its claim, or for Xu’s applications for security for costs not to succeed on merits alone.  I do not think that he had conceded the merits of the plaintiffs’ case to be such that it was right for me to take into account the relative strength of the parties’ cases in considering whether I should order security for costs: see §9(4) of my decision in Chinacast Education Corporation v Wu Shaoqing (HCA 1424/2016, 8 November 2016), quoted at §55 of the Decision.

16.  I do not repeat what I said concerning the respective merits of the parties’ cases at §18 of the Decision.  Suffice for me to say that I do not see how it is arguable that in a case of this nature, with the allegations being made by the plaintiffs against Xu, I can or should come to any view on the relative merits of the parties’ cases based on the evidence before me.  As I said in the Decision, in coming to this view I have taken into account all the evidence before me when I came to that view.  That included the evidence of Mr Leong In Heng (referred to at §2(a) of the draft Notice of Appeal), who would have to be the subject of cross-examination at trial as well.

17.  The plaintiffs laid emphasis on the fact that Xu had not given any explanation for a sum of HK$5,800,000 paid to him (see §9(3) of the Decision).  However, that sum would have to be considered in the context of China Art’s claim that it was paid over for the purchase of Tian Di, when Xu had denied making any misrepresentations regarding Tian Di as alleged.  While I note that Xu had not pleaded positively as to the purpose of that sum, the burden remains on China Art to prove at the trial what were the purpose and circumstances of the paying over of that sum, in particular what was said by Xu to Feng regarding Tian Di and Han Di at all times.  This will have to be tested out at trial.  What I cannot see now is that, even for this sum, the merits of China Art’s case are so clear that it is arguable that I should dismiss the applications for security for costs on this ground, or that there is a reasonable prospect of success in the appeal on this ground.

18.  The other points taken at the draft Notice of Appeal concerns Xu’s continued absence from Hong Kong (so that the payment of the security should at least wait until Xu returns to Hong Kong), and that the plaintiffs are reputable entities who/which are eager to invest in Hong Kong with substantial amount, and there is no reason for them not to fulfil their obligations to pay costs.  The quantum is also said to be excessive when compared with the residual amount left in Xu’s accounts.

19.  With respect, I fail to see how there is a reasonable prospect to argue successfully on appeal that any of these points is of any relevance, or at least of such relevance that the exercise of my discretion to order security for costs should be granted is wrong in the manner required for an appeal against a discretionary decision to be allowed, and no authorities are cited in support.  In deciding whether to order security for costs against entities ordinarily resident out of the jurisdiction, the focus is on the difficulties faced by the defendant in enforcing an order for costs abroad, rather than the status of the plaintiff (Izumo Mokko Co Ltd v TS Lines Ltd [2007] 2 HKLRD 363 at §15), and it is beside the point whether the plaintiffs do have financial strength outside Hong Kong, or that they may want (but have not yet) to invest here in substantial amount.  There is no evidence that they have so invested.  The issue is whether a defendant should be protected from the difficulties of enforcing a costs order against a foreign plaintiff if he wins at trial, by way of an order for security for costs, and the fact that the defendant himself is absent from Hong Kong for whatever reason, or how much money he has in Hong Kong, are not in my judgment relevant to the exercise of the discretion, certainly not to the extent of showing that the exercise of my discretion is arguably wrong to the extent required for it to be set aside on appeal. 

20.  Nor can I see how it is arguable at all that the quantum is excessive by reference to how much money Xu has in his accounts in Hong Kong.  No other grounds of appeal against quantum have been given.

21.  In my judgment, the proposed appeal against my orders for security for costs has no reasonable prospects of success. 

22.  Regarding the stay of execution of the orders to pay security for costs pending appeal, in the light of my refusal to grant leave to appeal against the orders, there is no basis to order a stay of execution.  In any event, no ground for a stay of execution has been provided, even if I were to grant leave to appeal.  There is no proper evidence before me that the plaintiffs are unable to pay those sums, or that any such sum (if paid into court, as I ordered) would not be recoverable should they succeed to overturn the orders on appeal.  I add that Mr Geoffrey Chang, counsel for the plaintiffs, also asks me orally today for an extension of time for seven days to pay the security.  However, apart from the difficulty arising from the fact that the actions have been dismissed, there is simply no basis for me to exercise my discretion to grant an extension of time, without any evidence explaining why the plaintiffs have not paid the security within 28 days as ordered or at any time before judgments were entered, why do they need seven more days, their financial circumstances, and why no applications for extension of time have been made earlier.

23.  I dismiss the applications for leave to appeal against, and for a stay of execution, and for an extension of time to comply with, my orders for security for costs.

C3. Leave to appeal regarding the Mareva injunction

24.  In support of the proposed appeal against my refusal to continue the Mareva injunction, in the draft Notice of Appeal the plaintiffs refer to various acts of Xu to suggest that there is overwhelming evidence that he was a fraudster, to support the case that there was a real risk of dissipation of assets by Xu.  Those acts include the acts complained of in the pleadings, as well as the acts of Xu in response to police investigations, and Xu’s continued absence from Hong Kong.

25.  In my judgment, all these are beside the point. In the Decision, I accepted that a risk of dissipation may be inferred from a good arguable case in support of an allegation that the defendant had acted fraudulently or dishonestly, or with unacceptably low standards of morality: see §41.  I did not ignore this point.  All these acts now referred to by China Art are to reinforce this point.  However, the basis of my decision regarding risk of dissipation is the delay by China Art to seek injunctive relief to restrain any dissipation which it says was and is likely to happen.

26.  The only ground in the draft Notice of Appeal which addresses this point is §2(c):

“ The Learned Recorder had erroneously speculated the reason why the Defendant did not remove the monies within his bank accounts before 2^nd November 2015 and then draw a conclusion that there was no risk that the Defendant would dissipate the monies therein. The hard fact was that the money within the relevant accounts was then frozen by the Hong Kong Police. The Counsel then acted for [China Art] had submitted to the Court at the ex parte stage that the accounts of the Defendant had been frozen by the Hong Kong Police, so that Mimmie Chan J. had full knowledge of the same because her ladyship decided to granted [sic] the ex parte application.”

27.  With respect:

(1) I did not speculate the reason why Xu did not remove the monies in his accounts.  It was for China Art to satisfy me that the undisputed fact that Xu did not remove the monies was not inconsistent with the existence of a risk of dissipation.  I found that it had not so satisfied me.

(2) The alleged “hard fact” of the freezing of the monies by the police was not before me.  I was not informed of this “fact” at the hearing in November 2016 when I dealt with the summons for the continuation of the Mareva injunction.  There is no evidence to that effect, or on when China Art was aware of that fact, or whether the delay in the making of the application for the Mareva injunction was due to this fact.  The only evidence before me at that hearing on the question of the freezing of the accounts of Xu is the second affirmation of Feng, made three days after the ex parte hearing before Mimmie Chan J, who at §10 said in late August or early September 2015:

“ I was also being informed that the Defendant may have bank account in Hong Kong with OCBC Wing Hang Bank and the police has likely frozen such an account with normal police procedures.”

Therefore, this was stated by Feng on hearsay evidence to be what was likely to have happened, and not the “hard fact” referred to in §2(c) of the draft Notice of Appeal and supposedly said to Mimmie Chan J. 

(3) In any event, what Mimmie Chan J was told is irrelevant as Her Ladyship did not hand down by reasons for decision.  The point is that at the hearing before me in November 2016, I was not told, and no evidence was shown to me, that there was in fact a freezing of the bank accounts.  Rather, at the hearing before me, it was put to me that Xu would definitely have moved the money away before 2 November 2015 had he known that Feng was aware of the bank accounts[2], thereby suggesting to me that there was no freezing of the accounts by anyone with lawful authority as at 2 November 2015, before the Mareva injunction was granted.

(4) In the light of this, I do not see how I can be said to have erred in failing to take into account this “fact” when I assessed the risk of dissipation before me.  It is not for me to speculate how this “fact” would have affected my, or any court’s, decision had it been taken into account.  However, if the Court of Appeal is to take this “fact” into account, new evidence thereon will have to be admitted on the Ladd v Marshall grounds.  I do not see any reasonable prospect for that to happen.

28.  As to the merits of the plaintiffs’ case relied upon by China Art here, I shall repeat what I said at §§15 – 17 above.

29.  China Art also argues that I should have allowed the injunction to be continued as the injunction is proprietary in nature, as both plaintiffs have pleaded a proprietary claim against Xu.  However, the case of China Art before me, and before Mimmie Chan J, was solely on the basis that it was a Mareva injunction that China Art was seeking.  The skeleton submissions before Mimmie Chan J and before me were based solely on the Mareva principles, with the justification for the injunction being risk of dissipation rather than ownership.  The draft summons dated 2 November 2015 placed before Mimmie Chan J asked for “A Mareva injunction be made in terms of the draft Order annexed hereto”, and even now the draft Notice of Appeal asks for the Mareva injunction to be continued.  Indeed, in his Supplemental Submissions before me now, Mr Chang argues that China Art would be entitled to a proprietary injunction “had one been applied for”.  This shows that one had not been applied for, as Mr Chang accepts.  This is different from the situation in Zimmer Sweden AB v KPN Hong Kong Ltd (HCA 2264/2013, 2 May 2014), for example, where at the hearing before the learned Judge, the parties did argue whether a proprietary injunction should be granted.  This did not happen before me.

30.  It is for China Art itself, as the applicant, to decide on what basis it is seeking interlocutory relief.  The court cannot do so for it.  If the entire basis of the application is based on the Mareva line of authorities, and not on the basis of a proprietary injunction at all, I fail to see how this can be a ground of appeal with reasonable prospect of success.  What I had to decide was whether a Mareva injunction should continue, not whether a proprietary injunction should be granted or continued.  If the matter does go before the Court of Appeal and it is willing to entertain arguments as to why a proprietary injunction pending trial should be granted, then it must be on the basis of a new application, and not an appeal from the Decision, which deals with a Mareva injunction only.  As the authorities cited by Deputy High Court Judge Kent Yee in Zimmer at §72 et seq confirm, the basis and nature of these two types of injunctions are different, as are the circumstances under which each will be granted. 

31.  The draft Notice of Appeal also complains about my decision dealing with the allegations of material non-disclosure made against China Art.  However, I held that only one such ground had been made out, and I would not have dismissed China Art’s summons to continue the Mareva injunction alone (see §§34 and 45 of the Decision).  I therefore fail to understand why this is a ground of appeal.

32.  In my judgment, China Art has not shown that it has any reasonable prospects of success in the proposed appeal against my refusal to continue the Mareva injunction, and leave to appeal is refused.  Since no leave to appeal is granted, the application in those summonses to continue the Mareva injunction until after the hearing of the appeal by the Court of Appeal likewise have to be dismissed (quite apart from the fact that, as Mr Wong submits, since the Mareva injunction had expired on 15 June 2017, there is nothing to be continued). 

D. INJUNCTION PENDING APPEAL

33.  That leaves the application by China Art for an injunction to freeze assets of Xu for 14 days by way of summons dated 19 July 2017, no doubt so that it can make the relevant applications to the Court of Appeal. 

34.  The application is supported by the sixth affirmation of Feng, and the basis of the application is that China Art is the owner of the monies in the relevant accounts, which are still being frozen by the police.  That is, what is asked for is a proprietary injunction pending the making of an application to the Court of Appeal for leave to appeal.  As stated, I am of the view that such an application can be made and considered notwithstanding the stay and dismissal of the actions.

35.  The American Cyanamid approach is applicable to an application for an interlocutory proprietary injunction (see Madoff Securities International Ltd v Raven [2012] 2 All ER (Comm) 634 at §§127 – 128, cited in Zimmer at §76), i.e. (1) whether there is a serious question to be tried on the merits; (2) whether the balance of convenience is in favour of grant; and (3) whether it is just and convenient to grant the injunction.

36.  However, when what the court is asked to do is to grant an injunction pending appeal, and not pending trial, so as to preserve the position pending appeal, the question is not whether there is a serious question to be tried on the merits at trial, but whether the appeal has a real prospect of success: see Gee, Commercial Injunctions (6^th ed) at §24-037.  Both counsel accept this.  But where the application is for an injunction pending an application for leave to appeal to be made to the Court of Appeal, then the threshold must be whether that application has a real prospect of success.  In the light of my decision above regarding leave to appeal, and for the reasons given above, I do not think that this threshold is satisfied.

E. CONCLUSION

37.  For reasons above, I dismiss China Art’s summonses dated 15 June 2017, 6 July 2017 and 19 July 2017 with costs to Xu with certificate for counsel to be taxed.

38.  I thank counsel for their assistance.