STANDARD CHARTERED BANK (HONG KONG) LTD v. SWEETMART GARMENT WORKS LTD AND OTHERS

 HCA1807/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1807 OF 2005

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J U D G M E N T

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1.  By summons filed on 22 February 2006, the plaintiff applied for a mareva injunction over the assets of the 2^nd defendant in Hong Kong, including his rights and interests in the estate of his late father Wong Mee, up to the value of HK$2,571,125.85 plus GBP1,048,577.74.

2.  At the direction hearing on 24 February 2006, upon the 2^nd defendant’s undertakings not to remove from Hong Kong or dispose of, diminish the value of or otherwise deal with his assets subject to certain exceptions and a cross-undertaking as to damages from the plaintiff, the summons was adjourned for arguments.

3.  At the conclusion of the substantive hearing on 30 June 2006, I granted the plaintiff’s application subject to the same exceptions and cross-undertaking as set out in the Order dated 24 February 2006.  My reasons appear below.

Background facts

4.  The 1^st defendant was a customer of the plaintiff.  As of 12 September 2005, the 1^st defendant was indebted to the plaintiff in the sums of HK$2,571,125.85 and GBP1,048,577.74 (“the Indebtedness”).

5.  The 1^st defendant had since the commencement of this action been compulsorily wound up by the court on 30 November 2005.

6.  The 2^nd defendant is the father of the 3^rd and 4^th defendants.  All three of them were the shareholders of the 1st defendant.

7.  By a written guarantee executed in March 2002 (“the Guarantee”), the 2^nd to 4^th defendants jointly and severally agreed to repay to the plaintiff on demand all monies then or thereafter advanced to or paid on account of the 1^st defendant and all other liabilities of the 1^st defendant to the plaintiff from time to time remaining unpaid and undischarged, provided that the principal amount for which the 2^nd to 4^th defendants shall be liable thereunder shall not exceed HK$20,000,000.

8.  By letters dated 24 August 2005, the plaintiff demanded from all the defendants payment of the indebtedness then due from the 1^st defendant to the plaintiff.  There is no dispute that the 2^nd defendant had received this letter of demand. 

9.  On 13 September 2005, the 2^nd defendant together with his solicitor attended a meeting with the plaintiff’s representatives to discuss repayment.   During the meeting, he handed over a typed-written letter purporting to revoke the Guarantee with immediate effect.  By a letter dated 14 September 2005, the plaintiff’s solicitors informed the 2^nd defendant that under the terms of the Guarantee, he could not revoke the Guarantee with immediate effect.

The action

10.  On 15 September 2005, the plaintiff commenced this action to recover the Indebtedness from the 1^st defendant pursuant to the terms of the General Customer Agreement dated 18 March 2002 and two facility letters dated 24 February and 12 March 2003 (“2003 Facility Letters”), all of which were signed and accepted by the 1^st defendant.

11.  The plaintiff further claims against the 2^nd to 4^th defendants for payment of the Indebtedness under the Guarantee. 

12.  The 1^st, 3^rd and 4^th defendants filed a joint Defence on 12 October 2005.  On 26 January 2006, summary judgment was entered against the 3^rd and 4^th defendant. 

13.  As the 2^nd defendant did not give notice of intention to defend, default judgment was entered against him on 15 October 2005.  Thereafter the plaintiff proceeded to execute the judgment by applying for a charging order in respect of the 2^nd defendant’s 100 shares in a company called Luenmay Enterprise Company Limited (“Luenmay”) and 3000 shares in the 1^st defendant.  I shall return to this in more details later.

14.  On 24 October 2005, the 2^nd defendant applied to set aside the default judgment.  Initially, the 2^nd defendant contended that the service of the Writ was bad.  This was not pursued at the hearing.  On 2 March 2006, Master Au Yeung set aside the default judgment on the merits of the proposed defence, and ordered the 2^nd defendant to pay the plaintiff’s costs assessed at $220,000.     

15.  The 2^nd defendant filed his defence on 30 March 2006.

The issues

16.  It is common ground that in a mareva injunction application, the ultimate question is whether it is just and convenient to grant the injunction.  In the circumstances of this case, the court is mainly concerned with two issues, namely, (i) whether the plaintiff has made out a good arguable case on its claim against the 2^nd defendant; and (2) whether it is established that there is a real risk of dissipation of assets by the 2^nd defendant. I shall deal with these issues in turn.

Good arguable case

17.  As noted above, the plaintiff’s claim against the 2^nd defendant is based upon the Guarantee.   The 2^nd defendant’s defence is that the Guarantee had been discharged by reason of material variations to the borrowing arrangements between the plaintiff and the 1^st defendant that took place without his knowledge and consent. 

18.  The 2^nd defendant’s pleaded case is that the banking facilities referred to in an earlier facility letter dated 13 February 2002 (“2002 Facility Letter”) formed the principal agreement and the commercial purpose underlying the Guarantee.  It is said that the subsequent 2003 Facility Letters differ from the 2002 Facility Letter in that there was one more category of banking facilities and some of the provisions were different.  On this basis, the 2^nd defendant contends that the 2002 Facility Letter was superseded and the 2003 Facility Letters constituted a new agreement between the plaintiff and the 1^st defendant.  As the substitution occurred without his consent, he was discharged from the Guarantee.  Alternatively, the variations were prejudicial to his interests as a surety such that he was discharged from the Guarantee.

19.  In its Reply, the plaintiff refers to various provisions in the Guarantee providing, inter alia, that it is a continuous guarantee of existing and future liabilities and that the plaintiff may vary or increase the facilities to the 1^st defendant without prejudice to the Guarantee and without discharging the 2^nd defendant’s liability as a surety.  The plaintiff also disputes the averments that the only commercial purpose of the Guarantee is the 2002 Facility Letter and that the 2003 Facility Letters had materially varied the relationship between the plaintiff and the 1^st defendant or had prejudiced the 2^nd defendant’s interest as a surety.

20.  The 2^nd defendant does not accept that the plaintiff has a good arguable case on its claim.  Essentially, it is said that in setting aside the default judgment, the Master had accepted that his defence had a real prospect of success and the plaintiff is not bound to succeed at trial. It follows that the 2^nd defendant has a good arguable defence.  It is also pointed out that the plaintiff had not appealed against the decision.  Hence, given the intrusive nature of a mareva injunction, it should not be granted. 

21.     I accept that mareva injunction is an exceptional remedy that should not be granted lightly.  The fact that the 2^nd defendant had succeeded in setting aside the default judgment on merits is of course a relevant factor in assessing the strength of the plaintiff’s claim.  However, I do not consider that it follows automatically that the plaintiff does not have a good arguable case or that the plaintiff is not entitled to a mareva injunction.  It remains for the court to assess all the relevant circumstances of the case.

22.  In the present case, the plaintiff’ claim is simple and straightforward.  The execution of the Guarantee and the Indebtedness are not disputed.  Prima facie, the plaintiff is entitled to payment under the Guarantee. The 2^nd defendant carries the burden of making good the defence that his liability had been discharged.  This defence involves mixed questions of facts and law.  Among other matters, the plaintiff had pointed out that there was a continuous course of dealings between the plaintiff and the 1^st defendant.  I note, too, that the 2002 Facility Letter provided for the grant of facilities to be subject to periodic reviews.  It is therefore necessary to examine the circumstances surrounding the 2002 Facility Letter and the Guarantee so as to see whether the Guarantee had only one commercial purpose or is a continuous one.   At the same time, the 2^nd defendant’s role and his involvement in the 1^st defendant is also relevant to his averment that he had no knowledge and consent of the 2003 Facility Letters.  Apart from being a shareholder, he was a director of the 1^st defendant until May 2005.  It is not possible at this interlocutory stage to resolve these issues of facts.

23.  Having regard to the nature of the claim and the defence and the materials before the court, I am satisfied that the plaintiff has made out a good arguable case.  While I note that the test for setting aside a default judgment on merits is whether the proposed defence has a real prospect of  success and that the 2^nd defendant had successfully set aside the default judgment, I do not consider that this should disentitle the plaintiff to the grant of a mareva injunction.

Real risk of dissipation of assets

24.  On the issue of real risk of dissipation of assets, the plaintiff relies principally on two events that occurred after default judgment was entered against the 2^nd defendant.

25.  The first is the transfer of the 2^nd defendant’s 100 shares in Luenmay to his daughter, Fiona, on 22 October 2005.  According to the 2^nd defendant, Luenmay is a real estate company set up by his late father in 1965. Currently, it owns a building in Tsuen Wan called Wong’s Factory Building.  The 2^nd defendant is the permanent director. His wife and eldest son, Ernest, are the ordinary directors. 

26.  Of the 60,000 ordinary shares in Luenmay, 56,000 shares are held by a BVI company on behalf of a family trust, the beneficiaries of which are the 2^nd defendant’s wife, Fiona and Ernest.  Neither the 2^nd defendant nor the 3^rd and 4^th defendants are the beneficiaries.  In respect of the remaining 400 shares, they used to be held by the 2^nd defendant and his wife.    

27.  On 26 May 2005, out of the 300 shares held by the 2^nd defendant’s wife, 100 shares were transferred to Fiona.  On 19 August 2005, Fiona was appointed the permanent managing director.  Then on 22 October 2005, the 2^nd defendant transferred his 100 shares to Fiona.  His wife also transferred her remaining 200 shares to Fiona.  The plaintiff came to know of the transfer in January 2006 in the course of enforcing the default judgment.

28.  The 2^nd defendant explained that Fiona was appointed the permanent managing director because he believed she was strong and could stand up against the 3^rd and 4^th defendants, and the transfer of the wife’s 100 shares to her in May 2005 was to make her eligible under the Articles and Associations of the company to be a permanent managing director.  As to the transfer of shares in October 2005, it was because he and his wife had by then made their wills and they felt that Fiona should also have their small parcels of shares as well.

29.  In my view, this episode of transfer of shares is important in several aspects.  Firstly, on the face of it, the transfer of the 2^nd defendant’s shares has the immediate effect of divesting his entire beneficial interest in Luenmay.  Fiona did not pay for the transfer.  The 2^nd defendant says that his 100 shares only represent 1/600^th of the shareholding.  However, it does not necessarily follow that the 100 shares had no or insignificant value.  It all depends on the asset position of Luenmay.  Although the 2^nd defendant mentioned in his 3^rd affidavit that Luenmay operated at a loss in December 2005 and was running short of cash, he gave no indication as to the overall financial position of the company.  Mr Yu argues that the transfer causes no prejudice to the plaintiff.  I cannot agree.  At the very least, it makes enforcement of any judgment the plaintiff may obtain against the 2^nd defendant more difficult. 

30.  Secondly, the transfer of the 2^nd defendant’s 100 shares took place just one week after the plaintiff had entered default judgment against the 2^nd defendant.  Admittedly, when the transfer was effected, the 2^nd defendant already had notice of the default judgment.  This is evident from his former solicitors’ letter to the plaintiff’s solicitors dated 21 October 2005, complaining of bad service of the Writ.

31.  I am also not impressed by the reasons given for the transfer.  The relevance of the daughter being strong enough to stand up against the 3^rd and 4^th defendants is not understood, given that the 3^rd and 4^th defendants are neither directors nor shareholders of Luenmay and, according to the 2^nd defendant, do not appear to have any beneficial interests in it.

32.  The second event relied upon by the plaintiff is the attempted sale of Wong’s Factory Building in January 2006.  According to the 2^nd defendant, the building was charged to HSBC to secure loans to Luenmay.  As at December 2005, the principal value of the loans stood at HK$59 million.  The building had been valued by HSBC to worth about HK$80 million to HK$ 90 million. At the same time, the 2^nd defendant had given personal guarantee to secure the loans to Luenmay.  

33.  In his 3^rd affidavit, the 2^nd defendant explained that the building was put up for sale because HSBC was asking for partial payment and he did not want HSBC to call in its loans to Luenmay since this would have an adverse effect on his finances.  Subsequently, HSBC was prepared to grant additional loans to Luenmay against the 2^nd defendant’s personal undertaking to make repayment on Luenmay’s behalf upon receiving distributions from the estate of his late father.       

34.  In his 4^th affidavit, however, the 2^nd defendant added that the attempted sale of Wong’s Building was also to provide funds to enable him to defend himself in various legal proceedings brought against him.

35.  I find these explanations hard to accept as a matter of logic.  As noted above, upon the transfer of his 100 shares to his daughter, the 2^nd defendant should cease to have any interest in Luenmay.  Why then would he want to incur more personal liabilities by giving an undertaking to HSBC in return for additional loans to Luenmay?  At the same time, how is it that the sale of Wong’s Factory Building, being an asset of Luenmay, could have provided him with funds to finance his own litigations?  It is also noteworthy that in both his 3^rd and 4^th affidavits, the 2^nd defendant said: “I attempted unsuccessfully to sell Wong’s Factory Building” (emphasis added).  All these tend to suggest he has an active and influential role in Luenmay and is very much in control of Luenmay, despite the transfer of all his shares.   As Mr Chan submits, there are grave doubts as to the genuineness of and the real purpose for the transfer of shares to the daughter. 

36.  Additionally, given the 2^nd defendant’s sworn statement that the sale of Wong’s Factory Building is also for the purpose of providing funds for his litigations, it is apparent that the sale is likely to produce a surplus for the 2^nd defendant’s own use, after discharging the debts due to HSBC.  Thus viewed, it is highly probable that Luenmay, despite its indebtedness to HSBC, is in a solvent state.

37.  Mr Yu points out that HSBC has been overseeing the sale of the building and there is as yet no willing buyer.  He submits that the attempted sale cannot be evidence of dissipation of assets.  While I accept that this is not actual dissipation of the 2^nd defendant’s assets, the attempt to sell the building is a relevant event.  This is particularly so when it is considered together with the transfer of shares in Luenmay, which holds the building, and the explanations offered by the 2^nd defendant with regard to the reasons for the transfer and the sale.   In my view, the plaintiff is justly concerned about the effect these events may have on its prospect to enforce any judgment it may obtain against the 2^nd defendant.

38.  Apart from these events, the plaintiff also points out that the 2^nd defendant is presently embroiled in no less than four sets of litigation brought by banks.  They were claims on guarantees.  The 2^nd defendant says that the signatures on the documents were forgeries and he believes one or the other of the 3^rd and 4^th defendants had forged his signatures to obtain advancements from banks.  One of the banks, UFJ Bank Limited had obtained default judgment against the 2^nd defendant.  By Order dated 20 December 2005 as varied on 26 June 2006, the default judgment was allowed to be set aside on condition that the 2^nd defendant pays into court the sum of HK$ 5 million within 35 days from 26 June 2006.  The 2^nd defendant has yet to comply with this condition.  Mr Chan rightly observes that in light of these difficult litigations and since the 2^nd defendant is admittedly resident in Canada, there is a real risk that he will dissipate his assets in such a way as to put them beyond the reach of his creditors.

39.  As put by the 2^nd defendant, his main asset is his no less than 50% interest in his late father’s estate.  The 2^nd defendant and his brother are the two beneficiaries named in the will.  Lately, the 2^nd defendant disclosed that the probate was already granted on 29 March 2006.  According to the provisional schedule of property, the value of the estate is in excess of HK$ 380 million.  Apart from his half share, the 2^nd defendant further claims to be a creditor of the estate to the tune of HK$ 320 million.

40.  The 2^nd defendant describes his interest in the estate as “contingent”.  In respect of his interest under the will, this is incorrect.  Neither is it unvested.  In fact, Mr Yu does not seek to dispute that the 2^nd defendant may soon receive some distributions under the estate.  There is also no difficulty in ascertaining the value of the 2^nd defendant’s interest in the estate, the bulk of which is made up of cash in banks.

41.  Mr Chan argues that it is open to the 2^nd defendant to instruct the executor to pay his share of the distribution to an offshore account so as to be out of his creditors’ reach.  In support of this argument, he draws to the court’s attention that it was after repeated demands that the 2^nd defendant provided three instalment cheques to the plaintiff to settle the $220,000 costs ordered by Master Au Yeung.  Even then, the last of the three cheques were strategically post-dated to 3 July 2006, being the first working day after the hearing of the mareva injunction application.  Mr Chan submits that this is demonstrative of the 2^nd defendant’s reluctance to meet his payment obligations, even in the face of a court order.  In my view, there is considerable force in this line of submissions.

42.  In short, for the above analysis and reasons, I consider that the plaintiff has demonstrated that the refusal of a mareva injunction will involve a real risk of dissipation of assets by the 2^nd defendant.

43.  Having regard to all the circumstances of this case, despite the drastic consequences, I am satisfied that it is just and convenient to grant the mareva injunction sought.

Conclusion

44.  Accordingly, I order that a mareva injunction be granted against the 2^nd defendant in terms of paragraph 1 of the plaintiff’s summons, subject to the three exceptions set out in the Proviso in the Order dated 24 February 2006 and subject to the plaintiff’s cross undertaking as to damages.   The costs of the application shall be the plaintiff’s costs in the cause.