LAU LAI SHAN LISA v. ZHANG QI AND OTHERS

HCA 1395/2018 &
HCA 1992/2019
(Consolidated)

[2023] HKCFI 1465

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NOS. 1395 OF 2018 AND 1992 OF 2019

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BETWEEN

(Consolidated pursuant to the Order of the Honourable
Madam Justice Cheng dated 28 February 2022)

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D E C I S I O N

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A. INTRODUCTION

1.  By a summons of 10th August 2022 (“the Summons”), the 1st Defendant seeks fortification of the undertaking as to damages provided by the Plaintiff in Schedule 2 of the injunction granted on 25th June 2018 against the 1st Defendant (“the Injunction”).

B. THE BACKGROUND

2.  It is the Plaintiff’s case that Kidbrooke Group Limited (“Kidbrooke”) was used by her uncle (“Lau Senior”) to hold various assets on trust for Lau Senior’s sons. The trust was established pursuant to a deed of settlement of 15th December 1997 (“the Trust”), with Lau Senior as the settlor. The Plaintiff was the sole shareholder and sole director of Kidbrooke and was tasked with managing the Trust and its assets. The Trust acquired four properties and earned rental income from such properties.

3.  The Plaintiff studied medicine and is a doctor. She says that that the work of administering the Trust was time-consuming, and her brother (“Alan”) helped out with such work, in accordance with Lau Senior’s wishes. In 2002, Alan met the 1st Defendant, and in 2007, they got married. The 1st Defendant then assisted in the administration of the Trust, and gradually earned the trust of the Plaintiff.

4.  The Plaintiff says that the 1st Defendant fraudulently induced her to sign various documents, including documents to transfer the sole share in Kidbrooke to the 1st Defendant, and resigning her position as director, by making various misrepresentations as to the contents and purposes of such documents. Thereafter, the 1st Defendant emptied Kidbrooke’s bank account, sold two of its properties, and assigned another property to a company owned by her; she then sold the share of Kidbrooke in May 2018 for $140m.

5.  It is the 1st Defendant’s case that Kidbrooke was instead used by Alan’s parents to hold and manage their assets for the benefit of Alan, and that the Plaintiff owned and managed Kidbrooke for Alan.

The actions

6.  The Plaintiff commenced HCA 1395/2018 on 15th June 2018, against:

6.1 the 1st Defendant;

6.2 the 2nd Defendant which was a limited company carrying on an accountant’s business; and

6.3 the 3rd Defendant who was the sole director and 90% shareholder of the 2nd Defendant. The Plaintiff says that the 3rd Defendant took various documents to her to sign, at the 1st Defendant’s instructions, and that the 2nd and 3rd Defendant received from the 1st Defendant $13.28m of the sale proceeds of Kidbrooke’s share.

7.  The Plaintiff commenced HCA 1992/2019 on 31st October 2019, against (what is now):

7.1 the 4th Defendant, another company owned by the 3rd Defendant, which is said to have received from the 3rd Defendant $5.9m of the aforesaid $13.28m;

7.2 the 5th Defendant, a director of the 4th Defendant and a barrister said to have been advising the 1st Defendant in relation to the sale of Kidbrooke. It is said that the 5th Defendant directed the 2nd and/or the 3rd Defendant to make a payment, on the 5th Defendant’s behalf, of $4m of the aforesaid $5.9m;

7.3 the 6th Defendant, the wife of the 5th Defendant. It is said that the aforesaid $4m was used to purchase properties in the name of the 6th Defendant.

8.  The actions were consolidated on 28th February 2022.

The injunction

9.  On 25th June 2018, the Plaintiff obtained an injunction against the 1st Defendant (“the Injunction”), restraining the 1st Defendant from (1) dealing with $80m of the proceeds of sale of the Kidbrooke share which were held by her solicitors and (2) dealing with her assets up to a further $60m. The Injunction was given against the Plaintiff’s cross-undertaking as to damages.

The current application

10.  The 1st Defendant applies for fortification of the cross-undertaking as to damages on the basis that there has been a change of circumstances since the time when the Injunction was granted, namely:

10.1 commencement of HCA 1992/2019 in 2019 and its consolidation with HCA 1395/2018;

10.2 downturn in the property market starting in 2022.

C. THE APPLICABLE PRINCIPLES

11.  There is no dispute as to the relevant principles. Where an application for fortification is made after the grant of the original injunction and giving of the cross-undertaking:

11.1 the applicant needs to show a reason why the late application should be entertained, by way of some significant change of circumstances, or compelling circumstances;

11.2 if the court is persuaded that the application should be entertained, the test to be applied is the ordinary test as to the grant or refusal of an order of fortification.

See Hui Chi Ming v Koon Wing Yee [2011] 1 HKLRD 260 at [36] to [39].

12.  As to the “ordinary test” as to whether to grant or refuse an application for fortification:

12.1 the court has a general power to order fortification where it appears just and proper to protect the defendant by making such an order;

12.2 usually, the merits of the parties’ cases are not a relevant consideration. However, if the plaintiff has a strong case, it may not appear just and proper to make the protection available to the defendant;

12.3 the burden of showing the need for fortification and the appropriate quantum falls on the defendant seeking fortification;

12.4 the defendant must show the likelihood of a significant loss arising as a result of the injunction, and demonstrate why he believes that the plaintiff will be unable to make good that loss;

12.5 the court will approach these issues by taking a broad view of the evidence, usually without the need for a detailed enquiry;

12.6 whilst there is no obligation on the plaintiff to give full and frank disclosure of his own financial means, circumstances might arise where the absence of disclosure might entitle the court to draw an adverse inference as to the plaintiff’s ability to meet his cross-undertaking in damages;

12.7 whilst fortification is not the necessary starting point, it is valid to consider whether a plaintiff’s financial position is such that, viewed fairly, may be said to raise realistic doubts as to the plaintiff’s ability to honour the cross-undertaking.

See Yan Yu Ying v Leung Wing Hei [2022] 3 HKLRD 270 at [81] to [83].

D. WHETHER CHANGE OF CIRCUMSTANCES

D1. Commencement of HCA 1992/2019 and consolidation with HCA 1395/2018

13.  Mr Anson Wong SC (appearing with Mr Peter Chung) for the 1st Defendant submitted that the significance of the commencement of HCA 1992/2019 and its consolidation with HCA 1395/2018 is two-fold. First, it is said that the mere fact of commencement of the 2019 action is that the Plaintiff needs to incur more legal costs, which will also mean that the resources which the Plaintiff will have to meet her cross-undertaking will be significantly reduced. Second, it is said that the fact of the consolidation will mean that the trial will take longer, will be fixed for later, and that the 1st Defendant will be subject to an injunction for a longer time and suffer greater loss than originally anticipated.

14.  I do not agree.

14.1 Prior to consolidation, the statements of claim in HCA 1395/2018 and HCA 1992/2019 were largely identical. The statement of claim in HCA 1992/2019 was essentially a duplication of the statement of claim in HCA 1395/2018, with the addition towards the end of some paragraphs relating to the onward payment of some of the proceeds of sale of the share in Kidbrooke to the 4th to 6th Defendants (or the application of such proceeds for their benefit). From the consolidated Re-Re-Amended Statement of Claim, it can be seen that apart from identifying the 4th to 6th Defendants in paragraphs 4B to 4E, pleading the payments to or for the benefit of the 4th to 6th Defendants in paragraphs 69B to 69I, and a few other minor amendments, the rest of the claim is against the 1st to 3rd Defendants. Furthermore, the newly added 4th to 6th Defendants cannot be said to be a wholly unrelated set of defendants: the 4th Defendant is a company owned by the 3rd and 5th Defendants; the 5th Defendant also advised the 1st Defendant in relation to the sale of Kidbrooke; the 6th Defendant is the 5th Defendant’s wife. Thus the amount of additional costs, if any, due to the commencement of HCA 1992/2019 would not appear to be substantially significant. I say “if any” in the light of the reduced time estimate referred to in the subsequent paragraph.

14.2 It would follow that (in theory) the amount of time for the trial of the consolidated actions would not be significantly longer than for HCA 1395/2018 alone. As a matter of actual fact, the amount of time which will be needed for the trial of the consolidated actions is much shorter than what was envisaged for HCA 1395/2018 alone: at the hearing, when I asked for an estimate of the length of the trial of the consolidated actions, Mr Wong and Mr Chung^[1] estimated that 18 days would be needed. Previously, in early February 2022, the parties had been asked for updated time estimates, and at the hearing of 28th February 2022, the parties to HCA 1395/2018 had estimated that 24.5 days would be required for the hearing of HCA 1395/2018 alone.^[2]

14.3 Whilst the parties in HCA 1395/2018 had stated in their listing questionnaires of August 2021 that the case was ready to be set down for trial, by the time that the matter came before me on 28th February 2022, the Plaintiff and the 1st Defendant had each indicated that they would call an additional witness, the 1st Defendant proposed amendments to her pleadings, and the parties anticipated that there would be yet further supplemental witness statements filed.^[3] As matters have transpired, there have been further interlocutory skirmishes between the parties, most recently in November 2022 when the Plaintiff sought to adduce further factual and expert evidence.

14.4 Meanwhile, the parties in what was originally HCA 1992/2019 have caught up. Counsel for the Plaintiff, Mr Toby Brown, indicated at the hearing that the final rounds of witness statements were due to be filed shortly.

15.  I therefore do not consider that there is any increase in costs or delay which could be said to be due to the commencement of HCA 1992/2019, or its consolidation with HCA 1395/2018, such as to constitute a significant change of circumstances justifying revisiting the issue of fortification of the Plaintiff’s cross-undertaking as to damages.

D2. Movement in property market

16.  The second matter relied on by the 1st Defendant to say that there has been a significant change of circumstances, or that there are compelling circumstances (as to why the fortification application should be considered), is the downturn in the property market starting in 2022. The Plaintiff and her husband jointly own a property at City Point in Tsuen Wan (“the City Point Property”). It is said that the fall in value of the City Point Property since 2018 (when the Injunction was granted), due to the Covid-19 pandemic, the tension between the PRC and western countries, and the recent interest rate increase, means that there has been a reduction in the pool of assets backing the cross-undertaking in damages.

17.  The 1st Defendant produced:

17.1 copies of an index taken from an estate agent’s website for the period from 2012 to July 2022 to make the point that the property market was on an upward trend from 2012 to June 2018, peaked in August 2021, and has since been gradually declining;

17.2 articles from Bloomberg and the South China Morning Post from 29th March 2022 to 31st July 2022, all predicting a general increase in mortgage loan interest rates and a slump in property prices. Singled out for mention was Goldman Sachs Group Inc’s prediction that property prices would drop by 5% every year from 2022 to 2025 before stabilising.

18.  Mr Wong relied on Hui Chi Ming at [48], [49] for the submission that a mere change in the form of a plaintiff’s assets (in that case, from shares to cash) could constitute a sufficiently significant change in circumstances so as to justify the court entertaining an application for fortification of the plaintiff’s cross-undertaking after the original grant of the injunction. Furthermore, there was no finding in Hui Chi Ming that the plaintiff intended to dissipate his cash, so that its full value would remain available to support the plaintiff’s cross-undertaking. It was said that a fortiori, in the present case, where the Plaintiff’s assets have not merely changed in form, but actually reduced in value, a sufficient change in circumstances must have been shown.

19.  However, the circumstances in Hui Chi Ming were that the plaintiff had identified his shareholding as the specific asset underpinning his cross-undertaking at the time of applying for the injunction, yet he disposed of it, and he did not satisfactorily explain why he sold it or account for what had become of the proceeds: see [50]. The disposal of the asset was instigated by the plaintiff. By contrast, in the present case, there is no suggestion that the Plaintiff has done anything nefarious. I do not agree that the present case is “stronger” than Hui Chi Ming.

20.  I do not consider that the evidence relied on by the 1st Defendant demonstrates any significant change of circumstances or compelling circumstances as to why the court should entertain the application for fortification.

20.1 Fluctuations in property values in response to external events are normal and to be expected. The evidence adduced does not suggest that the fluctuations are out of the ordinary.

20.2 The graph of the property index relied on shows an upward gradient between about 2016 and 2018, a bit of a drop between 2018 and 2019, and then a relatively overall flat gradient between 2019 and 2022. Roughly speaking, the level of the index in June 2018 is similar to the level of the index in 2022. Even assuming that the index accurately reflects the fluctuations in value of the City Point Property (there is no evidence in this regard), this would mean that the absolute value of the City Point Property has not in fact fallen since the time of the Injunction.

20.3 From the graph, it does not seem that the property market was on an upward trend as at June 2018; rather, the index had started falling some time prior to that. Insofar as the 1st Defendant suggests that at the time of the Injunction, she was not particularly concerned that the Plaintiff might not be good for her cross-undertaking by reason of her ownership of the City Point Property,^[4] this would have been against the background of (and despite) the property market moving downwards. The contrast she now seeks to draw between property market trends then and property market trends now should be seen in this light.

20.4 It is said that the property market is predicted to continue to fall until 2025, based on the articles adduced in evidence. However, the articles were generally written in the context of the restrictions imposed during the Covid-19 pandemic and the associated economic conditions. Several of the articles report the predictions made by Goldman Sachs Group Inc, who said that social distancing rules would combine with rising unemployment and higher borrowing rates to dampen demand, and that this would be reflected in lower home prices. A South China Morning Post article of 17th June 2022 reported that property developers had mostly written off the first quarter of 2022 when strict social distancing rules forced them to scrap their home sales from January to April 2022. Another South China Morning Post article of 27th July 2022 reported the Financial Secretary as saying that the movement in home prices in the second half of 2022 would depend on the pandemic. In other words, the articles and predictions relied on were just snapshots at particular points in time (mostly around March to July 2022), and market conditions will continue to change.

21.  I therefore do not agree that the downturn in the property market starting in 2022 constitutes a significant change of circumstances, or special circumstances, justifying the revisiting the issue of fortification of the Plaintiff’s cross-undertaking as to damages.

E. CONSIDERATIONS UNDER THE “ORDINARY TEST”

22.  In the light of my conclusion that there has not been any significant change of circumstances, or special circumstances, as to why the late application for fortification should be entertained, it is strictly speaking not necessary for me to proceed to consider whether, under the “ordinary test”, fortification should be granted. In case I am wrong in my earlier conclusion, and in deference to counsel’s submissions, I will set out my brief observations in this regard.

23.  It was common ground that if the 1st Defendant were able to show a change of circumstances or special circumstances, she would then have to go on to show (1) the likelihood of a significant loss arising as a result of the Injunction, and (2) why she believes that the Plaintiff would be unable to make good the loss.

E1. Likelihood of significant loss

24.  In her evidence,^[5] the 1st Defendant says that she would suffer loss of about $14m resulting from the Injunction, assuming that the trial would take place in 2024, calculated as follows:

24.1 $10,440,000, being loss of rental income at 2.5% per annum from purchase of “low-risk property” and “other investments” generating a stable return. Such purchases would have been funded from (i) cash of $68m which has been frozen pursuant to the Injunction and paid into court and (ii) cash of some $1.6m which has been frozen in bank accounts, of which $1.3m had been earmarked for a down payment of the purchase price of a property referred to as the Po Shing Mansion Shop;

24.2 $1,440,000, being loss of interest at 2% per annum from a loan of $12m which was to have been advanced to a friend in Taiwan (“Liu”) pursuant to an agreement said to have been entered into in May 2018. The $12m would have come from funds which have been frozen pursuant to the Injunction and paid into court;

24.3 $2,160,000, being loss of interest at 2% per annum from a loan of $18m earlier advanced to Liu pursuant to the same agreement. It is said that Liu has refused to continue to pay interest on this part of the loan as the 1st Defendant has failed to advance the aforesaid $12m.

25.  The aforesaid sums of $68m and $12m were frozen pursuant to the Injunction and paid into an interest-bearing account of the court pursuant to a court order of 17th December 2019. However, as at 27th July 2022, only $112,060.81 has been earned by way of interest. This is unlikely to be of much significance in offsetting losses caused by the inability to use the funds during the period of the Injunction.

26.  Mr Brown pointed out that no evidence has been adduced to support the claim that the 1st Defendant could expect an annual return of 2.5% from 2018 to 2024 on the investments which were intended to have been made with the $68m and $1.6m. In his skeleton argument, Mr Wong cited authorities to say that best lending rates have been used in cases where a substantial amount of money was frozen and no specific investments were planned. However, as Mr Brown submitted, in the present case, the 1st Defendant was specific as to the use planned for the $68m and $1.6m, so it is incumbent on her to adduce the evidence to show what return would have been made from such a use and accordingly lost as a result of the Injunction; having failed to do so, she cannot simply fall back on an argument that returns of some sort would have been made, for example by placing the cash in fixed deposits. I agree. Whilst the 1st Defendant exhibited a table published by the Rating and Valuation Department indicating average yields of rent for various classes private property in 2018, there is no evidence as to what yields would have been in subsequent years. I therefore do not consider that the 1st Defendant has sufficiently shown what loss is likely to have been suffered as a result of the freezing of these amounts.

27.  Mr Brown further submitted that on the 1st Defendant’s own evidence, property prices are falling and will not rise till 2025, so that the capital value of any investments which would have been made with the $68m and $1.6m would be expected to fall during this period. However, I agree with Mr Wong that the focus should not be on the capital value of the investments but on the loss said to arise from the lost opportunity to earn rental income, this being caused by the operation of the Injunction.

28.  As for the loss arising from the freezing of the $1.3m, Mr Brown challenged the genuineness of the purchase of the Po Shing Mansion Shop. However, this challenge was raised only in Mr Brown’s skeleton, so that the 1st Defendant has not had a proper opportunity of putting forward evidence in relation thereto. Mr Brown submitted that it was open to him to make the challenge based on the documents produced by the 1st Defendant and by reference to observations made in the decision of DHCJ William Wong SC in [2019] HKCFI 2170, being a decision in HCA 1395/2018 relating to the 1st Defendant’s application to vary the Injunction. However, the challenge involves allegations of dishonesty against the 1st Defendant. For example, it is said that the 1st Defendant had falsely claimed that the $1.3m was intended as a down payment for the purchase of the Po Shing Mansion Shop, and had instead used the funds to pay off the 3rd Defendant’s overdraft. I agree with Mr Wong that as a matter of fairness, it is not appropriate for me to take a view about the matter when the 1st Defendant has not had a proper opportunity of filing evidence to respond to such allegations; nor can the observations made by the court in determining another interlocutory application between the parties be taken as findings of fact binding on the court in this application, or indeed even as evidence of such facts.

29.  As for the loss arising from Liu’s refusal to pay interest on the $18m previously advanced by the Plaintiff, and the loss of interest from the inability to advance a further $12m to Liu, again, Mr Brown sought to challenge the genuineness of the loan agreement in his skeleton argument, without having raised it on the evidence. Again I agree with Mr Wong that as a matter of fairness, it is not appropriate for me to come to any conclusion about this when the 1st Defendant has not had a proper opportunity of filing evidence to respond to allegations of this nature.

30.  On the other hand, it is not known whether the 1st Defendant would really ultimately suffer the loss of interest, at least in relation to the $18m said to have already been lent to Liu, given that the 1st Defendant’s case is that he is obliged to pay interest, although he is currently refusing to do so (and claims to be entitled to so refuse). The 1st Defendant says that she and Liu have agreed to hold off commencing legal action against each other until the conclusion of the current proceedings.

31.  Thus whilst on a broad view of the evidence, I would accept that the 1st Defendant demonstrates that she would suffer some loss arising as a result of the Injunction, I consider that she has not shown what loss is likely to have been suffered as a result of the freezing of the amounts of $68m and $1.6m, and in relation to the interest payable on the $18m lent to Liu. In saying this, I am not suggesting that the 1st Defendant needs to show to a balance of probabilities the amount of loss which she would suffer. Such proof is not required: Yan Yu Ying at [95], citing Energy Venture Partners Ltd v Malabu Oil and Gas Ltd [2015] 1 WLR 2309. However, given that the 1st Defendant has specifically said that she would have invested in “low-risk property for rental returns and other investments to generate stable return”, but has not adduced evidence to support her claim as to what those returns would be, and given the uncertainty as to whether the 1st Defendant would really be unable to recover interest from Liu in relation to the amount lent to him, it is not possible to make an “intelligent estimate … of the likely amount of any loss which may be suffered” (see Yan Yu Ying at [95]) – at least not so as to enable a view to be taken that the Plaintiff will be unable to make good such loss, given that the Plaintiff does have some assets from which damages can be paid, as discussed below.

E2. Why the 1st Defendant believes the Plaintiff will be unable to make good the loss

32.  According to the Plaintiff, the net equity in the City Point Property is currently in the region of $10.9m to $11.36m, so that her half-share is in the region of $5.45m to $5.68m. She says that all along the mortgage repayments have been made punctually, so that the net equity will continue to increase over time.

33.  The Plaintiff earns an annual income of about $2m, and she would also be entitled to a retirement benefit of about $2m if she were to choose to retire now, the amount increasing if she continues to work in her current position.

34.  Mr Wong submitted that:

34.1 the property market is continuing to decline, so that the City Point Property will be less valuable in a few years’ time;

34.2 the Plaintiff’s husband does not have a regular job so that there is no other source of income for the family, which includes two children;

34.3 the Plaintiff has to bear the costs of the litigation, which are likely to be heavy.

35.  However, I note that:

35.1 the 1st Defendant’s evidence is that the property market will stabilise by 2025;

35.2 the 1st Defendant’s own case is that Lau Senior, who claims to have been the beneficial owner of the assets transferred to the Trust, has been supporting the litigation and may have been financing some of it.

36.  In the light of the uncertainty referred to in the previous section as to the degree of loss which the 1st Defendant is likely to suffer as a result of the Injunction, I am unable to come to the view that the level of assets which the Plaintiff has disclosed would be insufficient to enable the Plaintiff to make good such loss.

E3. Relevance of merits

37.  Mr Brown submitted that the Plaintiff has a strong case that the assets of the Trust came from Lau Senior. However, Mr Brown seeks to rely on the earlier decision in [2019] HKCFI 2170 for this purpose. As already noted above, the observations made by DHCJ William Wong SC cannot be treated as findings of fact or as evidence for present purposes. Furthermore, as Mr Wong points out, since the time of that decision, the parties have filed further witness statements, addressing some of the points in the decision.

38.  Mr Brown also made reference to the statements which the 1st Defendant made to the police regarding the events which occurred. It is apparent that there are a number of inconsistencies which call for explanation, but that will be a matter for cross examination at trial, and it is not possible at this stage to come to any view as to the veracity of the 1st Defendant’s case without first giving her the opportunity of responding to the points raised.

39.  I therefore do not consider it appropriate to go into the details of the merits of the parties’ cases for the purpose of this application.

F. DISPOSITION

40.  I dismiss the Summons. I further make a costs order nisi that the 1st Defendant pay to the Plaintiff the costs of and occasioned by the Summons, to be taxed if not agreed.