K & L GATES v. NAVIN KUMAR AGGARWAL

HCA 1061/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1061 OF 2011

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BETWEEN

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D E C I S I O N

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1.  The Defendant applies for variation of the injunction order so as to permit payment out of money to fund his legal costs.

BACKGROUND

2.  The Defendant was a former partner of the Plaintiff.  During his tenure and over a course of years, he had stolen vast sums of the Plaintiff or from its clients’ accounts.  That, admitted by the Defendant, was because of his gambling problem.  Some of the money was transmitted to persons (including family friends) or entities for no apparent legitimate purposes.

3.  The Plaintiff applied for and obtained an injunction from Poon J on 27 June 2011, which was slightly varied by me on 8 July 2011 (“the Injunction Order”).    The Injunction Order restrains the Defendant, amongst others, from disposing of assets up to HK$621,000,000.  It also requires him to make disclosures (“the Disclosure Order”):

Para 2(1):  to list out assets of a value of HK$50,000 or more;

Para 2(2)(a):  to explain in detail each and every payment from the Plaintiff’s bank accounts which related to payments or receipts for or in furtherance of his wrongdoing in relation to a number of persons or entities;

Para 2(2)(b): to explain in detail the flow of funds, location of assets, destination and reasons for payments, value of assets, identities of legal and/or beneficial owners.

Para 3: to exhibit supporting documents.

THE DEFENDANT’S APPLICATION

4.  The Defendant criticizes the Injunction Order as having made no provision for his living expenses, let alone his legal expenses.  He asks for release of funds to meet his legal costs for various proceedings.

5.  The Plaintiff opposes the application on the grounds that the Defendant was in breach of the Injunction Order and should not be heard before he purges his contempt of Court.  The Plaintiff also says that the Defendant has failed to meet the requirements for seeking release of funds subject to an injunction.

BREACH OF THE INJUNCTION ORDER

6.  The Plaintiff asserts that the evidence at this stage reveals flagrant breaches of the Injunction and hence contempt of Court such that the Court should not hear the Defendant’s application.  In Hadkinson v. Hadkinson [1952] 2 All ER 567, Romer LJ said,

“The first is that anyone who disobeys an order of the court (and I am not now considering disobedience of orders relating merely to matters of procedure) is in contempt and may be punished by committal or attachment or otherwise. The second is that no application to the court by such a person will be entertained until he has purged himself of his contempt.”

7.  In the same case, Denning LJ (as he then was) also said,

“Applying this principle, I am of opinion that the fact that a party to a cause has disobeyed an order of the court is not of itself a bar to his being heard, but if his disobedience is such that, so long as it continues, it impedes the course of justice in the cause, by making it more difficult for the court to ascertain the truth or to enforce the orders which it may make, then the court may in its discretion refuse to hear him until the impediment is removed or good reason is shown why it should not be removed.”

8.  With regard to the disclosure order, the Defendant has purportedly made a list of his assets of over HK$50,000 (“the List of Assets”) and annotated a Trust Ledger Report (“the Report”) showing his explanation to various entries therein “based on his usual habit or pattern but not necessarily on his personal recollection”.    Mr Hon acting for the Defendant claims that given the limited access to documents and information, the Defendant has done what could practically be expected of him. 

9.  The Plaintiff regards there to have been failure to comply with the Disclosure Order.  The Defendant has also purported transferred shares in a company through a broker (“Quam”).  He has also failed to disclose his holding of shares in the Hang Ten Group.

10.  In deciding whether the Defendant has acted in breach of the Injunction Order, I have taken into account the following matters:

(i)   The Defendant has been cooperative; from the start he has  frankly admitted his theft to one of the Plaintiff’s partner.

(ii)   Although the Disclosure Order permits him not to disclose matters that might incriminate him, the Defendant has not sought to hide behind this privilege.

(iii)   He has offered to have an interview with the Plaintiff’s solicitors which was conducted last Friday.  He gave authorizations to enable the Plaintiff’s solicitors to investigate his bank accounts and other entities. 

(iv)   Although he is a lawyer, he is not familiar with litigation.

(v)   He has been in custody and would not have the convenience of access to documents to refresh his memory on matters or to provide supporting documents for his assertions.

11.  Given all these allowances, the Defendant has not even begun to explain the flow of funds pursuant to para 2(2)(a) of the Injunction Order.  The disclosure was so lacking in details that it did not meet the very purpose of the Disclosure Order – to enable tracing.   Supporting documents are lacking and there is no evidence that he is procuring documents if they are not in his possession.  It is true that he has stated in the List of Assets securities accounts and contact persons from whom the Plaintiff can make enquiries. However, that merely shifted the burden of enquiries and disclosure to the Plaintiff.   There was prima facie breach of paras 2(1), 2(2)(a), 2(2)(b) and 3 of the Order.

12.  As Mr Dawes for the Plaintiff submits, the Defendant might need more time.  He might attract the sympathy of the Court because of the fact that he is in custody.  But it is no answer for him to give such brief statements which go nowhere near full compliance with the Injunction.  It was not just a simple breach of its terms. 

13.  At this stage, on the evidence, I refrain from making a provisional view on whether there has been flagrant or inadvertent breach of the Injunction Order by transferring shares through Quam.   This matter does not alter the position of either party as far as the present application is concerned.

14.  In National Bank of Greece v. Constantinos Dimitriou, The Times, November 16, 1987, the defendant who was subject to a Mareva injunction was in contempt of Court in failing to disclose the details of his assets and their whereabouts pursuant to a disclosure order against him.  The defendant similarly applied to the Court for a variation of the injunction to enable him to use assets subject to the injunction to pay his solicitors.  In fact, the defendant had a lot of undisclosed and unfrozen assets from which he could have funded his costs.  The Court of Appeal refused to make the order that would assist a defendant who was abusing the process of the court and is in contempt of court.

15.  Therefore, before the Defendant complies with the terms of the Injunction Order, I am of the view that the Court should not hear his present application.

NATURE OF THE INJUNCTION

16.  As rightly pointed out by Mr Dawes, the present injunction was in aid of a proprietary claim by the Plaintiff.  The assets in question belonged to the Plaintiff (or its clients) and not the Defendant.  The distinction between an ordinary Mareva injunction and an injunction in aid of a proprietary claim has been stated by Millet LJ (as he then was) in Ostrich Farming Corporation Ltd v. Ketchell [1997] EWAC Civ 2953 (CA):

“The courts have always recognised a clear distinction between the ordinary Mareva jurisdiction and proprietary claims. The ordinary Mareva injunction restricts a defendant from dealing with his own assets. An injunction of the present kind, at least in part, restrains the defendants from dealing with assets to which the plaintiff asserts title. It is not designed merely to preserve the defendant’s assets so as to be available to meet a judgment; it is designed to protect the plaintiff from having its property expended for the defendant’s purposes.”

17.  Because of its nature of being an injunction in aid of a proprietary claim, no provision was thus made for living and legal expenses.  (In any case the Defendant being in custody does not require living expenses.)

THE TESTS FOR VARIATION

18.  In an application to vary an injunction in aid of a proprietary claim like the present one, a 2-stage test is involved as summarized in the judgment of Wharf Ltd & ors v. Lau Yuen How & ors [2010] 1 HKLRD 783 per Au J:

“13. The principles applicable to the release of funds to pay legal costs from an injunction involving proprietary claims are well settled. It is an exercise of discretion which involves a 2-stage process:

(a) First, the defendant applying for the release of funds has to demonstrate with full and frank evidence that there are no alternative funds or assets available to him which can be used to pay his legal expenses other than the assets in respect of which the plaintiff brings the proprietary claim. If the defendant fails in this first hurdle, the Court needs not consider the 2^ndstage and the application should be dismissed.

(b) Secondly, once the first hurdle is cleared, the Court in the exercise of its discretion will engage in a balancing exercise to weigh the potential injustice to the plaintiff if releasing the funds against the possible injustice to the defendant of depriving him of the opportunity to have legal assistance in advancing what may eventually turn out to be a successful defence. This process is a “careful and anxious judgment”, and the court is entitled to look at all relevant circumstances, and in particular, to weigh the relative strengths of the plaintiff’s proprietary claim in the funds and the defendant’s defence to that claim. In relation to this, it is not sufficient for a defendant to merely establish that he has no other funds, for even so, he must also show that there is an arguable case for his having recourse to the funds in question, failing which, he has not right to use the money. As Millet LJ (as he then was) said in Ostrich, infra, “[n]o man has a right to use somebody else’s money, for the purpose of defending himself against legal proceedings”.

See: Ostrich Farming Corporation Ltd v Ketchell, per Roch LJ at page 10; Liu Xian Feng v Liu Bo [2006] 4 HKLRD 33, 37B-H paras 10, 11, per Le Pichon JA; Lit Ma v. Chen Kang Huang (unrep., HCSD 9/2007, HCA 218/2005, [2007] HKEC 1605 paras 23-28.

LACK OF ALTERNATIVE ASSETS

19.  Apart from a bare averment that all his assets have been frozen under the Injunction Order and that there is no other available asset for him to utilize for the payment of legal costs, there is no evidence in support.  The Defendant has not disclosed whether he has assets below the value of $50,000. It was just impossible to assess his current means.  It was only in the 3^rd affirmation of Ms Chan, solicitor for the Defendant, filed in reply that it was confirmed that the solicitors had not received any amount from the Defendant or his family members although the Defendant’s younger sister has repeatedly indicated that she would reimburse the legal fees.

20.  The Plaintiff has discovered an Agarwal Trust document in the Defendant’s former room in the Plaintiff’s office in which the Defendant has interest in.  The Defendant claimed that he has absolutely no interest in this Trust; that he was appointed a director and has already resigned.  There has however been no provision of any documentation in support of this resignation. During the hearing, Mr Hon acting for him pointed out that the spelling of the Agarwal Trust has only one “g” which made it different from the name of the Defendant containing 2 “g’s”.  If this was true, this should be done by way of affidavit evidence and not counsel’s submission.

21.  Further, initial investigations of the Plaintiff shows that the Defendant has transferred substantial sums of money from the firm’s clients’ accounts to people who are believed to be family friends or relatives of the Defendant for no apparent legitimate reasons.  There was no evidence from the Defendant as to whether he had tried to recover sums from these people or approached them for financial assistance.

22.  In the light of such evidence, the first hurdle is not met and the court need not even consider the second stage.

WEIGHING THE RELATIVE STRENGTH OF THE PLAINTIFF’S PROPRIETARY CLAIM AND THE DEFENDANT’S DEFENCE

23.  The Plaintiff has a very strong proprietary claim supported by the clear admission from the Defendant that he had misappropriated money from the Plaintiff and/or its clients.  The Defendant is charged with theft and forgery in connection with some of such misappropriation and is under criminal investigation. The Defendant has not begun to demonstrate that he has an arguable defence or that the frozen funds belong to him rather than the Plaintiff: Commercial Injunctions, 5^th ed, at para 20.057.  As Millet LJ (as he then was) said in Ostrich Farming Corporation Ltd v. Ketchell [1997] EWCA Civ 2953 (CA),

“If he cannot show an arguable claim in his part to the funds, he has no right to use the money. A trustee has no right to have recourse to trust money to defend himself against a claim for breach of trust unless he has an arguable case for saying that he has a beneficial interest in the funds in question. No man has a right to use somebody else’s money, for the purpose of defending himself against legal proceedings. Just as the Court’s jurisdiction to grant the injunction in the first place depended on the plaintiff’s establishing an arguable case that the money belongs to it, so its willingness to permit the defendant to have recourse to the money depends upon his establishing an arguable claim to the money.”

24.  In the premises, the Defendant fails in stage 2 as well.

THE FUNDS TO BE RELEASED

25.  For completeness, I also deal with the funds for which the Defendant seeks to be released.  The Defendant initially seeks to release funds from 3 bank accounts of his.  At the hearing he seeks amendment of the Summons so as to release funds to be deposited in court.  I can see no objection to the proposed amendment and so I give leave for the amendment.  However, in my view, whichever funds the Defendant is aiming at, the application is bound to fail.

26.  From the annotations in the Report, it can clearly be seen that, as submitted by Mr Dawes, the Defendant had mixed up the funds of the subject claim with his personal funds.  It is unrealistic to treat the bank accounts as his personal account.

27.  With regard to funds to be deposited into court, they involved an amount of HK$3.75 million which one Mr Lo received from the Defendant on escrow but intended to repay the Defendant after a sale of shares fell through.  Through his solicitors, Mr Lo has purported to deliver a cheque to the Defendant’s solicitors.  The Plaintiff’s solicitors pointed out that Mr Lo’s solicitors and the Defendant might be in breach of the Injunction Order in handling the Defendant’s assets and suggested that the cheque should be returned to Mr. Lo. There followed some correspondence among the 3 solicitors firms on whether or not the cheque should be returned to Mr Lo in exchange for a cheque written out to the Registrar of the High Court and then paid into Court for the credit of this action.  The Plaintiff’s solicitors has drafted a consent summons for the purpose of paying in the cheque yet to be received into Court but the Defendant’s solicitor has not yet endorsed it.  To date no funds have yet been deposited into court.  In this respect, the application under the Amended Summons is pre-mature.

28.  That aside, the $3.75 million from Mr Lo was said to have originated from the Defendant’s SCB account.  The Defendant claims also that the funding for the SCB account was from his winnings from the casinos in Macau and/or his other legitimate income and has nothing to do with the Plaintiff’s alleged property.  As mentioned above, the misappropriation of the subject funds was because of the Defendant’s gambling problem and he had intermingled the subject funds/gambling monies with his personal funds.  It is unrealistic to treat this HK$3.75 million as his own funds.

29.  Accordingly, I am not satisfied that an order should be made for release of any part of the $3.75 million.

OTHER APPLICATIONS UNDER THE SUMMONS

30.  The Amended Summons asks for liberty to apply to vary the amended Injunction Order.  I do not think a special order is required.  There is always liberty for the Defendant to apply for variation or discharge on good grounds being shown.

31.  The meaning of the paragraph which seeks that “the costs order is made absolute from the Plaintiff to the Defendant” is not clear.  Mr Hon says that the Defendant is really asking for costs of this application.  As the Defendant fails in this application, he should bear costs instead.

CONCLUSION

32.  I order as follows:

(i)   There be leave to the Defendant to amend the Summons;

(ii)   That the amended Summons be dismissed.

33.  This application shows a lack of foundation and was badly prepared for hearing.  The 3^rd affirmation of the solicitor for the Defendant was filed the day before the hearing but a copy was handed up to me only on the morning of the hearing.  The bundle for hearing was lodged in the afternoon before the hearing after I have already read the file.  The bundle did not contain all the pertinent documents including the Injunction Order and the Plaintiff’s affidavit supporting the application for the Injunction.  The skeleton submission was faxed in only in the morning 18 minutes before the hearing when there was no opportunity for me to read it.  The Plaintiff indicates that it may seek costs on a higher basis.  However, a weak case or one sloppily prepared is not in itself a good reason to seek costs on a higher basis and the burden remains on the Plaintiff to demonstrate that there are special or unusual circumstances to justify that higher basis.  For present purposes, I order:

(iii)   On a nisi basis, that costs should be to the Plaintiff to be summarily assessed on 12 September 2011 at 9:30 am on the papers without attendance.  A costs statement shall be filed and served by 1 September 2011. Grounds in opposition should be filed and served by 8 September 2011. 

34.  I thank counsel for their assistance.