TAIHAN ELECTRIC WIRE CO LTD AND ANOTHER v. LEE CHI YUEN ARCTIC AND OTHERS

HCA 454/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 454 OF 2013

____________

____________

__________________________

REASONS FOR DECISION

__________________________

1.  The plaintiffs seek an interim Mareva injunction pending full argument on the summons. I have dismissed the application after hearing on Friday. Here are my reasons.

THE APPLICATION

2.  Between 2008 and 2011 a fraud was perpetrated on the plaintiffs, resulting in loss to them of about US$36m.  The plaintiffs issued a writ on 14 March 2013 to sue the various defendants in conspiracy to defraud and to injure, constructive trust on the grounds of knowing receipt and dishonest assistance, conversion of property and breach of contract.  The application for an injunction was first made ex parte, which was dismissed, and then pursued in this inter parte hearing.  The plaintiffs claim that there was urgency in this application because of acts of dissipation after the writ was issued.

THE BACKGROUND

3.  P1 is a Korean manufacturer of copper rods and P2 is its wholly owned Hong Kong subsidiary which managed the sales business of P1 in Hong Kong and Southern China.

4.  D1 (“Lee”) is a director and shareholder of D3 (“Yuanzhi”) and D4 (“Winful”) which were sales agents for copper rods manufactured by P1.  Lee had full control of the bank accounts of Yuanzhi and Winful.  He is also the sole director and shareholder of D5.

5.  D2 (“Mrs Lee”) is a housewife and wife of Lee.  She is the sole shareholder of D6 and sole director of D7.

6.  D8 is employed as the accounting assistant of Yuanzhi and Winful and the sole director and shareholder of D10.

7.  D9 is the acquaintance of Lee and the sole director and shareholder of D11.

8.  Lau used to be a sales agent held in high regard by the plaintiffs.  He had the full responsibility of finding end customers and he was in complete control of sales contracts, cargoes, delivery documents and invoices for end customers.  He was a 50% shareholder of Yuanzhi.

9.  Yuanzhi and Winful acted as sales agents for the plaintiffs.  They obtained copper rods from the plaintiffs and took advantage of the 21-day free storage period of the container yard in Hong Kong to try and find end-customers. Having received the proceeds of sale (which really belonged to the plaintiffs), Lau and Lee diverted part of the money to their own money making venture.  They would share the profits.  They also took advantage of the 30-60 day credit period given by the plaintiffs to end-customers to delay payments to the plaintiffs and disguise their misappropriation of money.

10.  The scheme worked well when the sales increased significantly in between 2007 and 2010.  In 2009, Yuanzhi and Winful had twice relied on mortgages of cargoes to obtain significant cash flow to meet the drop in demand and prices.

11.  By March 2010, the plaintiffs had started to ship copper rods directly to customers and required the agents to pay the plaintiffs directly.  The cash flow for Yuanzhi and Winful significantly reduced. 

12.  The relationship between Lau and Lee fell apart towards the end of 2010.  Lau claims to be concerned that Lee was taking too much money, and not accounting to Lau.

13.  The plaintiffs had not discovered the fraud because of their own system of recording sales by reference to shipment instead of to specific customers.  In 2011 there was significant reduction in supply from Korea, which created cash flow problem for the cover-up.   

14.  In September 2011, the plaintiffs’ representatives came to Hong Kong to discuss with Lau their concerns over the proceeds of sale but Lau became uncontactable.  Relying on Lee’s version of fraud, P2  instituted HCA 1687 of 2011 (“the 2011 action”) on 4 October 2011 against Lau, Yuanzhi, Winful and one Kar Yue (Fu Hing) Trading Co Ltd (a trucking company engaged by Lau).  P2 obtained a Mareva injunction against Lau, Yuanzhi and Winful and a disclosure order against Kar Yue.

15.  Meanwhile, Lau was prosecuted for using a copy of a false instrument in the District Court but was acquitted on 5 October 2012.  Until then, Lau was prohibited by the police from speaking to the plaintiffs who were witnesses for the prosecution.  After his acquittal, Lau entered into a settlement agreement with the plaintiffs whereby he admitted liability, agreed to entry of judgment against him in the 2011 action, and provided assistance to the plaintiffs to prosecute the present action which implicates Lee and others as co-conspirators. 

16.  The plaintiffs say that trading in copper rods is a low margin business.  Yet Lee has been able, within a short time since 2007 to amass an inexplicable amount of money allowing him to purchase properties with a total acquisition price of about HK$50.4m.  D5, D6 and D7 are said to be companies incorporated shortly before purchase of the properties under their respective names.  There were for the primary purpose of laundering money taken by Lee from Yuanzhi and Winful which should have been paid to the plaintiffs for copper rods.  D8 and D9 are said to have personally received and procured their respective company, D10[1] and D11, to receive money misappropriated under the scheme and to hold properties.

17.  The defendants own various bank accounts and insurance policies, disclosed pursuant to the order in the 2011 action, with an aggregate balance of about HK$20m.  The defendants have also trading margin accounts with unknown balances.

THE PRINCIPLES

18.  There is no dispute on principles.  To obtain a Mareva injunction, the plaintiffs must show a good arguable case on the merits; real risk of dissipation of assets in such a way that a future judgment would go unsatisfied and that it is just and convenient to grant the injunction: Akai Holdings Ltd v Ho Wing On Christopher [2009] HKCU 172 at para 35.

19.  Evidence of an unacceptably low standard of commercial morality or questionable integrity, will entitle the court to conclude that there is a sufficient risk to justify a Mareva injunction: Honsaico Trading Co v Hong Yiah Seng Co Ltd, [1990] 1 HKLR 235 at para 24; Standard Chartered Securities v Lai Arthur & ors [1993] 1 HKC 375, at para 45.

20.  Where a good arguable case is established on a claim for fraud or dishonesty, the court may be more willing to infer a real risk of dissipation: Akai Holdings,para 53.

21.  Since the plaintiffs are seeking an interim injunction even before the defendants have the opportunity to file evidence, the plaintiffs have to demonstrate urgency.  I will deal with this point first.

URGENCY

22.  The plaintiffs accept that they have delayed in taking out this action notwithstanding knowledge of Lee’s involvement in the fraud 1½ years ago.  Their ex parte application on 14 March 2013 for a Mareva injunction in the present case was not granted by Mr. Justice Anthony Chan.  However, they say that there has since been dissipation of assets 4 days thereafter, in that 2 properties belonging to Lee, 1 held by D6 (Mrs Lee’s company) and 1 held by Mrs Lee, have been mortgaged to one Full Faith Asia Inc which was incorporated in the Republic of Vanuatu for general banking facilities repayable on demand.  The mortgage deeds were on virtually identical terms with no indication of what the credit facilities were.  The office used by Winful and used by Lee was sold on 19 October 2010.

23.  Mr Manzoni SC submits that the timing of the purchase of properties and incorporation of companies provide strong evidence to demonstrate that those entities were incorporated to try to cover up money taken by Lee, Yuanzhi and Winful under the fraud.  He submits that the risk of dissipation is heightened by the fact that Lau’s solicitors in the 2011 action came off the record on 25 January 2013 and by the commencement of the present action. 

24.  In my view, it can hardly be said that there was urgency.  By virtue of the pleadings and the fact that Lee has filed 14 affirmations in the 2011 action, Lee obviously would have known that at some stage, the plaintiffs would make him a defendant and freeze his companies at some stage.  Yet, there has been delay by the plaintiff for 1½ years before the present writ was issued. The alleged sudden “dissipation” of assets appears unreal. 

25.  Not only that, the plaintiffs, though aware of the alleged dissipation, has chosen to state in Mr Georgiou’s affidavit that,

“Given the elapsed time, and the fact that several of the assets that are the subject of this application area real estate assets (and therefore cannot be readily dissipated) or are otherwise covered by an existing Mareva injunction … the plaintiffs considered it appropriate in these circumstances to proceed with this application inter partes to ensure that this Honourable Court has the opportunity to receive written or oral submission from all concerned parties before rendering any interim or final relief.”

26.  The plaintiffs’ move in this hearing in seeking an interim injunction is not in compliance with that position on affidavit.  The defendants have been ambushed with this application and face 2 versions of the plaintiffs (advanced with the assistance of Lau and Lee respectively) and has had no opportunity of contradicting the plaintiffs.

27.  Significantly, there is also an element of abuse of process.  Mr Barlow SC draws to my attention that the facts in the 2011 action are a complete overlap with the present action. Mr Manzoni SC does not seriously dispute this but he says that the plaintiffs went against the wrong person, Lau, in the 2011 action and now turn their attention towards Lee.

28.  With respect, that begs the question as to why the plaintiffs have not brought Lee into the 2011 action by way of amendment and sought a Mareva injunction against Lee there.

29.  Likewise, asking for another Mareva injunction against Yuanzhi and Winful here is a clear abuse of process.  Moreover, instituting an action against Winful in this action created a juridical disadvantage to it.  Winful is owned by Lau and Lee in equal shares.  As a result of Lau’s failure to cooperate, Winful is unrepresented at this hearing, whereas it has been properly defending in the 2011 action.  Mr Barlow SC informs me that a director of Winful is present at this hearing to speak so that Winful will not fall into default.  There is all the more reason not to impose an injunction without letting Winful sort out its representation.

30.  Mr Barlow SC is instructed that there was no dissipation.  The 4 mortgages were made because the reputation of Winful was damaged as a result of the injunction granted in the 2011 action and it had to turn to other sources of finance.  For present purposes, I shall disregard this information which has not yet found its way into the evidence.

31.  I find there to be abuse of process and no urgency to justify the grant of an interim injunction.

32.  If I am wrong, I have proceeded to consider whether the principles for granting a Mareva injunction have been met.

GOOD ARGUABLE CASE ON THE MERITS

33.  I accept for present purposes that if Lau is to be believed there is a serious question to be tried as to the fraud and who should be held responsible for it.  There is also evidence of low standards of commercial morality on the part of Lee.   However, I entertain doubts as to whether or not there is evidence in support of the causes of action against each defendant.

34.  For a start, the court is asked to act on the evidence of Lau, a confessed fraudster.  He has been prosecuted but Lee has not.  He has been acquitted but Mr Barlow SC informs this court that it was because the prosecution witnesses were not believed or were found wanting that the case was not proved beyond reasonable doubt.  Lau has elected not to give evidence in the criminal trial.  To impose a Mareva injunction hastily on the evidence of Lau without affording an opportunity for Lee and other defendants to file evidence and state their case is not fair.

35.  Further, there has been no statement of claim despite lapse of 4 weeks since the writ was filed.  Looking at the endorsement of claim and the evidence:

(i)      There is no pleaded case on who the parties to the conspiracy to defraud/to injure were.

(ii)     Two causes of action are in breach of contract or procuring breach of contract but the only contract was between Lau (who is not a party here) and P2. 

(iii)    The causes of action in conversion and misappropriation of money have been pleaded in the 2011 action but Lau is not a defendant here.

(iv)    The causes of action in constructive trust based on knowing receipt and dishonest assistance are not based on evidence but “supposition” mentioned in the course of submission of Mr Manzoni SC.

36.  I now look at the causes of action against individual defendants.  Insofar as Lee and his holding companies (D5 and D7) are concerned, it is said that the properties were purchased with proceeds of sale of the goods because Lee could not have the money himself to buy those properties, notwithstanding that he ran Yuanzhi and Winful.  This contradicts Lau’s version that he did not know that Lee was in fact using the misappropriated money to buy properties; he thought that Lee was only using the money to do other businesses.

37.  Insofar as Mrs Lee and her company (D6) are concerned, I query in what way she could be connected to the proceeds of the sale and hence the fraud.  Mr Manzoni SC said that the properties were initially bought in the name of Lee and his wife.  It is a “supposition” that the proceeds of sale of the goods had gone to the wife.  She must have known that the money used for the purchase of properties was derived from a fraudulent scheme. 

38.  With respect to Mr Manzoni SC, it is trite law that fraud is not to be lightly raised and has to be pleaded with particularity.  The supposition is not enough to show an arguable case of fraud against her, especially since the first property was purchased in 2006, before the fraudulent scheme even started.   Dishonesty, which is an element of knowing assistance, has not been demonstrated against her.

39.  With regard to Yuanzhi and Winful, who are parties to the 2011 action, the immediate question that springs to mind is why they are joined in the present action.  A Mareva injunction is already in place against them.  Here, Mr Barlow SC points out that there is a complete duplication of action and an abuse of process.  Yuanzhi and Winful have already pleaded to P2’s case, engaged in multiple interlocutory hearings and Lee has filed 14 affirmations.  It is an abuse of court process to sue them here, especially both actions are premised on similar facts.

40.  To this, the plaintiffs stated in the affidavit of Mr Georgiou (solicitor for the plaintiffs) that the plaintiffs will undertake to stay the 2011 action.  However, the application for a stay has been rejected by a master in a case management conference already.  Moreover, the 2011 action has a counterclaim by Winful.  Accordingly, the assertion that there would be a stay is most misleading to this court.

41.  D8 is said to be the accounting assistant of Yuanzhi and Winful.  It is said that as accounting assistant, she only received a small salary.  She assisted Lee in laundering money.  She let Mr Lee use her company (D10) to hold a property.  D9 is said to be a sales manager in an iron and steel trading company.  He holds a property in the name of D11.

42.  According to Lau, he learnt from D9 that Lee had been paying D8 and D9 for their assistance in the laundering exercise.  No particulars of this conversation and the assistance have been given in  Lau’s affidavit.  Such tenuous evidence from a fraudster is not sufficient to show an arguable case of conspiracy, fraud, knowing receipt and dishonest assistance.

43.  For lack of a good arguable case alone, I would not have granted the interim injunction.  However, this is not the end of the matter. 

MATERIAL NON-DISCLOSURE

44.  There are aspects of material non-disclosure in the plaintiffs’ case which should not be overlooked.

(i)      Failure to disclose the existence of a failed ex parte application in the present case;

(ii)     Failure to disclose the court’s doubt in the 2011 action as to the financial ability of P1 as a going concern. 

(iii)    Failure to disclose the impact of the injunction imposed in the 2011 action on the business of Winful.

(i)  Non-disclosure of a failed ex parte application in the present case

45.  With regard to (i), I discovered the transcribed decision of Mr Justice Anthony Chan in the court’s correspondence file.  The decision succinctly stated the reasons for refusal which I agree.  (I am not at liberty to state them here as the judgment was marked “not open to the public”).  It should have been put into the weighing scales before this court.

46.  The ex parte order was not drawn up. I am told that the defendants have not been served with the affidavits and skeleton submission in support of the ex parte application, nor the decision.  The plaintiffs’ explanation was that the learned judge had returned the affidavits to them after the ex parte hearing. 

47.  With respect, the affidavits must have been returned for filing purpose.  Even if not, there was no reason why their existence and the skeleton submission were not drawn to the defendants’ attention.  The plaintiffs should seek directions from the learned judge to clarify what should be done with the affidavits.

(ii)  Failure to disclose the court’s doubt as to the financial ability of the plaintiffs

48.  P1 has no business or assets in Hong Kong.  Although it is listed in Korea, its ability to continue in trade has been questioned by auditors in its latest available financial statements.

49.  P2 is a shell company and the only plaintiff in the 2011 action.  Deputy Judge Lok (whose judgment was not disclosed by the plaintiffs to me) doubted in the 2011 Action the ability of P2 to make good the potentially substantial loss to Winful by the ex parte injunction. 

50.  The plaintiffs declined to state a sum to fortify their undertaking as to damages in return for the defendants’ undertaking not to dispose of assets until the inter parte hearing. These non-disclosures are thus material as they throw in doubt on the ability of the plaintiffs to honour its undertaking in damages in the present case.

(iii)  Non-disclosure of the impact of the injunction imposed in the 2011 action on the business of Winful

51.  In the 2011 action, Deputy Judge Lok found that the ex parte Mareva injunction has ruined Winful’s business and caused loss to it in the sum of US$8.5 to US$11.5m and that P2 appeared to be unable to pay them.  Deputy Judge Lok ordered P2 to fortify its undertaking further by increasing the sum from HK$200,000 to US$3m.  (See the judgment in HCA 1687 of 2011, at para 14-16, 19, 20 and 22.)

52.  This non-disclosure is material in that it may affect this court’s exercise of discretion over whether to grant the interim injunction and what fortification to ask for from the plaintiffs. 

53.  Mr Barlow SC informs the court that Lee has to start another business – D5 in the present action – to trade in copper and copper futures because of the damage to Winful.  If an injunction is granted here, it will destroy D5, as it had destroyed D3 in the 2011 action.  For present purposes, I do not need to rely on this piece of information which has not yet found its way into the evidence.

CONCLUSION

54.  For all the above reasons, I decline to grant the interim injunction sought on an urgent basis. 

55.  I order, nisi, that the plaintiffs do pay the defendants’ costs of this hearing, with certificates for 2 counsel (Mr Barlow SC and Mr Hung) for the present hearing.  Given the ambush on the defendants to face the present summons it was well justified to have Mr Hung (counsel for the defendants in the 2011 action) to assist Mr Barlow SC.  They together with Mr Ho have come up with a very succinct and useful set of skeleton submission for this hearing.

56.  I thank counsel for their assistance.