CHINA METAL RECYCLING (HOLDINGS) LTD AND ANOTHER v. CHUN CHI WAI AND OTHERS

HCA 1412/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1412 OF 2013

_______________________

_______________________

D E C I S I O N

_______________________

The applications

1. The plaintiffs (collectively China Metal) seek an order striking out the defence and counterclaim of the 5^th defendant (Cheung Fat) and judgment against Cheung Fat, for non‑compliance with an unless order made following two disclosure orders made in conjunction with a Mareva injunction (the sanction summons). 

2. Cheung Fat counters that summons with an application for relief from sanction under Order 2, rule 4 of the Rules of the High Court, in the event of being found in breach of a subsequent disclosure order which encompassed the first disclosure orders and extended them, (the relief summons).  Cheung Fat, by a second summons, (the strikeout summons) seeks an order that the statement of claim, in so far as certain paragraphs concern or relate to it, be struck out on the grounds that the statement of claim discloses no reasonable cause of action against Cheung Fat.  In the alternative it is argued that, as against Cheung Fat, the allegations are frivolous and vexatious, and amount to an abuse of process of the court.  The strikeout summons further seeks the discharge or variation of the disclosure order.

The factual allegations

3. In order to properly understand the circumstances in which these applications must be considered I now summarise the principle facts alleged by China Metal, and Cheung Fat’s response to those facts.

4. The 1^st plaintiff (China Metal Recycling) is a Cayman Islands company that is listed on the Hong Kong Stock Exchange. According to its 2009 annual report HK$1,695 million was raised by the public offering of its shares.  The 2010 report showed that the issue of a further 90 million new shares in the company raised a further HK$691 million. A total of HK$2,386 million had been raised from the public by the promoters of this company.

5. The 2^nd plaintiff (Central Steel) is a wholly owned subsidiary of China Metal, and is incorporated in Macau SAR.

6. In January 2013, at its own request, trading in China Metal Recycling shares was suspended.  On 26 July 2013, upon a petition presented by the Securities in Futures Commission (SFC) provisional liquidators were appointed in respect of both plaintiffs.

7. The 1^st defendant (Mr Chun) was at all material times the Chairman of the Board of Directors of China Metal Recycling and its chief executive officer.

8. Cheung Fat is a Hong Kong company wholly owned by a Ms Zhong Liue who is resident in Guangzhou, PRC.  Cheung Fat admits in its defence that it is a supplier of scrap metal to Central Steel and says that the scrap metal supply business was mainly handled and conducted by Ms Zhong and a Mr Frank Lv.

9. The statement of claim alleges that between 30 June 2013 and 29 July 2013, immediately prior to the appointment of the provisional liquidators, Mr Chun authorised the remittance of payments totalling HK$1,215 million to Cheung Fat without supporting documents or legitimate commercial purposes.  It is alleged that these payments were made by Mr Chun in breach of his fiduciary duties to the plaintiffs and that the payments were not for any genuine or legitimate commercial purpose or for the benefit of the plaintiffs. 

10. In its defence, filed on 20 December 2013, Cheung Fat admits that between 30 June 2013 and 29 July 2013, Central Steel paid a total sum of RMB782,300,000 and US$7,100,000 (HK$1,033 million) to Cheung Fat.  It denies that the payments were without legitimate commercial purpose and says that they were made pursuant to a series of scrap metal contracts between Cheung Fat and Central Steel, details of which are set out in a schedule to the Defence.  The schedule comprises brief details showing the date on which amounts were paid to Cheung Fat by Central Steel, the amount, the currency, the contract numbers, the date of invoices, the amount invoiced, the invoice number, and the invoiced currency.

11. The evidence from the China Metal will be that the contract numbers set out in schedule were not numbers that had ever been issued or used by either of the plaintiffs.  China Metal will say that any documentation that purports to support the information in the schedule is false or a forgery.

12. In China Metal’s Reply, it is said that Cheung Fat’s 2011/2012 Hong Kong Profits Tax Return form dated 28 August 2012, signed by Ms Zhong on behalf of Cheung Fat, stated that Cheung Fat was then a dormant company.  Cheung Fat has not filed a rejoinder denying this fact.

13. In simple terms, the case for the plaintiffs is that Mr Chun stripped the public company of a very substantial sum of money by the use of forged or false documentation including contracts, invoices, packing lists, and shipping documents.  The plaintiffs say, which is denied that, through a web of individuals and entities, Mr Chun is closely connected with Cheung Fat.

The procedural history

14. In order to properly understand the nature of the alleged non‑compliance with the disclosure order it is necessary to set out the procedural history.

15. On 30 July 2013, the Mareva injunction and first disclosure order was made by Tong J.  The restriction on the disposal of assets was in respect of some HK$1,682 million.  The order contained the following disclosure provisions:

2.1 The 1^st to 12^th Defendants must inform the Plaintiffs in writing, within 48 hours of service of the order of all their assets of an individual value of $50,000 or more, whether inside or outside Hong Kong, whether in its own name or not, and whether solely or jointly owned, giving the value, location and details of all such assets.

2.2 In particular (Cheung Fat) must inform the Plaintiffs in writing within 48 hours of service of this order on it of the current location of all portions of the sums totalling HK$680,299,270 which was received by (Cheung Fat) in its bank account held with the Bank of China (Guangzhou Branch) and Industrial Commercial Bank of China (Guangzhou Branch) between 15 July 2013 and 26 July 2013.”

16. On 31 July 2013, the orders were served on Cheung Fat.

17. On 23 August 2013, Cheung Fat filed an acknowledgement of service of the writ through its solicitors.

18. On 29 August 2013, China Metal’s solicitors complained by letter to Cheung Fat’s solicitors of the failure to comply with the disclosure obligations, and demanded compliance forthwith.

19. On 2 September 2013, Cheung Fat’s solicitors replied stating that they were taking instructions.

20. On 4 October 2013, the statement of claim was filed.

21. On 13 December 2013, Anthony Chan J granted disclosure orders against Cheung Fat’s bankers pursuant to section 21 Evidence Ordinance.  The bank accounts listed were those at HSBC, Bank of China Hong Kong, and Bank of China Ltd, Guangzhou KFC Branch (BoC (G)).

22. On 20 December 2013, Cheung Fat filed its defence and counterclaim.

23. On 5 March 2014, eight months after the Mareva injunction and the first disclosure order were made, China Metal filed a summons for a further disclosure order against Cheung Fat, and an unless order if the original and further disclosure orders were not complied with (the unless order summons).  The application for further disclosure repeated the first disclosure requirements set out in §15 above and added the following requirement:

“In the event that any assets or any part of the sums had been disposed of, incumbent or otherwise dealt with between 30 July 2013 and the date on which the said affidavit or affirmation is sworn, providing full particulars of the circumstances in which such dealings took place (including without limitation the identities and contact details of the transferor/charger and it transferee/chargee of all such assets, the date of each transfer/charge, the consideration paid in respect of such transfer/charge and its current whereabouts, and the reason(s) underlying the making of each transfer/charge);”

24. On the same day, China Metal’s solicitors informed Cheung Fat’s solicitors that they intended to seek the unless order at a hearing on 13 March 2014.

25. On 13 March 2014, the unless order summons came before DHCJ Tam SC.  The summons did not proceed to resolution on that day.  Instead, leave was given to Cheung Fat to file opposition evidence within 10 days, on the basis that Cheung Fat was in the process of seeking to comply with the first disclosure order.

26. On 14 March 2014, China Metal’s solicitors wrote to Cheung Fat’s solicitors seeking a clear indication as to when Cheung Fat would comply with the first disclosure order.

27. On 17 March 2014, Cheung Fat’s solicitors replied stating their client would require a further six weeks to comply.  No explanation was offered by Cheung Fat as to why, after over eight months since the first disclosure order was originally made, a further six weeks was still required.

28. On 24 March 2014, the 1^st affirmation (Ou 1^st) of a Mr Ou Yongzhao (Mr Ou) was filed by Cheung Fat.  In that affidavit Mr Ou said that he was “a manager in the Administrative Department of Zhongshan City Cheung Fat Metal Recycling Company Limited” and that  he was authorised by Cheung Fat to make the information.  The precise relationship between that company and Cheung Fat was not set out.  There was no explanation as to why the affirmation should not have been made by either Ms Zhong or Mr Lv, who, according to the defence, “mainly handled and conducted” Cheung Fat’s scrap metal supply business”[1].

29. The affirmation made no disclosure in accordance with the requirements of the first disclosure order other than asserting that the monies received by Cheung Fat from China Metal were all normal transaction payments, and commenting upon what Cheung Fat perceived as the difficulties it faced in complying with the disclosure requirement.  Mr Ou said that Cheung Fat would use its best endeavours to solve issues of human resources and costs so as to be able to comply with the disclosure obligation as quickly as possible.

30. On 1 April 2014, Cheung Fat issued a summons to discharge the first disclosure order.  That application was made 9 months after the making of the first disclosure order.

31. On 7 April 2014, the substantive hearing of the unless order summons took place before Judge Tam SC.  Following protracted argument, the judge exercised her discretion to make the unless order, allowing until the close of business on 14 April 2014, for compliance, in default of which the sanction would be for the defence and counterclaim to be struck out.  The judge ordered further disclosure, (the second disclosure order), to be made within the same time limit, increasing the amount in the §2.2 of the order to HK$1,682,198,420 (see §15 above).

32. The judge was satisfied that there had been non‑compliance with the first disclosure order.  She said:

“In particular, I am conscious of the fact that the compliance for the existing disclosure orders have been outstanding for over 8 months, with no apparent attempt made to comply with them, nor any legitimate excuse, nor any genuine steps to take legal advice on whether and how to comply with them. I am driven to conclude from the evidence and the objective facts that non-compliance was deliberate, contumelious and without due cause.”

33. It is to be noted that that finding was made notwithstanding Ou 1^st that had been filed for Cheung Fat.  It follows that the judge was not satisfied with the extent of the disclosure contained in Ou 1^st.  No challenge by way of appeal was made against that finding, or against the second disclosure order.

34. On 9 April 2014, Cheung Fat’s summons to discharge the first disclosure order was withdrawn.

35. On 14 April 2014, the last day for compliance with the second disclosure orders made on the unless summons, Cheung Fat filed a second affirmation by Mr Ou (Ou 2^nd) in purported compliance with the orders made on the unless summons.  That affirmation showed that on Friday, 11 April 2014, letters, addressed to Cheung Fat’s bankers, were signed.  The letters, for the first time, requested copies of bank statements of all accounts maintained with the banks covering the period since July 2013, and authorising Cheung Fat’s solicitors to collect the statements.  On Monday, 14 April 2014, the last day for complying with the disclosure orders made on the unless summons, the solicitors sent the request for copies of the bank statements to the relevant banks.  There was no explanation as to why the bank statements had not been requested immediately after the making of the first disclosure order nine months earlier.

36. The affirmation further exhibited a letter addressed to Cheung Fat’s suppliers, who were unidentified, informing them that Cheung Fat was required by the Mareva injunction and disclosure order to disclose information relating to commercial transactions with the suppliers. Although there was nothing in the letter to which the suppliers might be required to respond, the letter sought a prompt response from the suppliers.

37. On 30 April 2014, the sanction summons, now before me, was filed.  The sanction summons was listed to be heard on 28 May 2014.  On the same day, China Metal’s solicitors wrote to Cheung Fat’s solicitors setting out what they considered to be material deficiencies in the disclosure contained in Ou 2^nd.  There has been no response to that letter.

38. On 23 May 2014, China Metal’s counsel’s skeleton argument for the sanction summons was filed.  On that day, the Court notified the parties that the hearing of the sanction summons, which was fixed before L Chan J on 28 May 2014, was vacated by the judge because the 30 minutes that had been allocated was not sufficient time in which the matter could be properly heard.  The parties were asked to refix the hearing date.

39. On 26 May 2014, the solicitors for China Metal informed Cheung Fat’s solicitors that they would attend the Deputy Clerk of Court (Civil) on 29 May 2014, to refix the hearing.

40. On 28 May 2014, Cheung Fat’s solicitors wrote to the solicitors for China Metal, copying the letter to the court, with proposed directions for the sanction summons and seeking time to file evidence in opposition.

41. On 29 May 2014, by letter, China Metal’s solicitors rejected the proposed directions.  The directions sought would have permitted Cheung Fat 28 days to file affirmations in opposition, a further 14 days for China Metal to reply, and that the sanction summons be fixed, in accordance with counsel’s diaries, not earlier than 23 July 2014.  If acceded to by China Metal, the hearing of the sanction summons, and potentially the time available for compliance with the disclosure summons would have been extended, having regard to the requirement to follow counsel’s diaries, for at least a year from the making of the first disclosure order, and the time for compliance with the second disclosure order, from 7 days to over three months, if not longer.  It is not surprising at all that China Metal rejected the proposed directions.  Cheung Fat made no attempt at all to seek such directions from the court.

42. On 30 May 2014, the hearing of the sanction summons was fixed to be heard by me on 17 June 2014.

43. On 12 June 2014, five days, (two working days) before the hearing of the sanction summons, Cheung Fat filed a third affirmation by Mr Ou, (Ou 3^rd), made on that day, in purported compliance with the disclosure order.  At the same time, the relief summons and the strikeout summons were filed by Cheung Fat.  In the strikeout summons an order was also sought reducing the amount frozen by the Mareva injunction to HK$138 million and the discharge of the first disclosure order.  Discharge of the second disclosure obligation pursuant to the unless order made by Judge Tam SC was also sought.

The state of play on 17 June 2014

44. Ms Sit was quite entitled to summarise the extent of the time taken by Cheung Fat to purport to comply with the disclosure orders in the following way:

- over 10 months since the service of the Mareva injunction and disclosure orders;

- 15 weeks since the unless order summons was filed;

- 10 weeks since the unless order was made;

- 9 weeks since purported compliance in Ou 2^nd;

- 7 weeks since the filing of the striking out summons and the China Metal's solicitors statement to Cheung Fat’s solicitors of the areas in which the disclosure had been inadequate; and

- 2.5 weeks since the hearing date for the strikeout summons was refixed.

These periods must be viewed in the light of the fact that the original requirement to make disclosure was within 48 hours of the service of the order (31 July 2013), and the requirement of the unless order made on 7 April 2014, which was to make disclosure within 7 days, by 14 April 2014.

The standard of disclosure required

45. The first issue that must be determined is whether or not Cheung Fat is in non-compliance with the unless order. 

46. First, the order must be clear.  There was no suggestion that the order was not in any way clear.

47. The second issue that arises is the extent, or standard, with which the order must be complied.  Ms Sit argued that the standard by which disclosure must be judged in the circumstances of a disclosure order coupled with a Mareva injunction was much higher than that required for discovery of documents.  Mr Hui sought to apply the same standard in this case as applies in discovery of documents.

48. In relation to discovery of documents the standard required has been set out in Realkredit Danmark A/S (a body corporate) & Ors v York Montague Ltd & Ors (Unreported, [1998] All ER (D) 638), by Tuckey LJ, after first dealing with the need for precision in the order, in the following terms:

“There was nothing unclear about the order made in this case, in that it required service of a list of documents. But a list was served so, prima facie, the order was complied with. Interestingly there is no reported case of an action being struck out as a result of the list being incomplete. But there is in the much litigated field of Further and Better Particulars where, in Reiss v Woolf [1952] 2 QB 557, pages 559-560, the Court of Appeal approved a passage from the judgment of Devlin J who said:

‘So construed, ‘default’ refers to default on the delivery of the document within the specified time.  I do not, of course, mean that any document with writing on it will do.  It must be a document made in good faith and which can fairly be entitled ‘particulars’.  It must not be illusory; ... That is the test, in my judgment, and not as the plaintiff contends, whether each demand for particulars has been substantially met.’”

49. Tuckey LJ went on to say that a party dissatisfied with a list, even a list supplied consequent upon an unless order, would ventilate his complaints within the context of an application for further and better list, or an affidavit verifying the list or specific discovery.  Ms Sit reminded me that these powers in respect of discovery contained in O. 24, where there is an inadequate list, have no equivalent in respect of the requirement for disclosure under a disclosure order contained within a Mareva injunction. Consequently, she argued, a much higher threshold must be imposed upon a party required to make disclosure.  I note that, in a similar vein, the power to strikeout proceedings under  O. 18 r. 19, where pleadings may prejudice, embarrass or delay the fair trial of an action or are otherwise an abuse of the process of court, provides the Court with a remedy is a party considers that the other party is in default of an order for further and better particulars.  That remedy is similar to the remedy in O. 24.

50. I accept that submission.  The whole purpose of Mareva injunctions and consequent disclosure orders is to protect and secure assets in order to ensure that a judgment obtained in litigation will not go unsatisfied.  That is quite a different situation from the discovery situation where the purpose of discovery is to ensure that each party is properly informed of the documents the other party may have in relation to the case and to assist the court in resolving issues at trial.  It is quite different from the requirement for proper pleadings which are necessary in order that a party may know the case it must face: see Aktieselskabet Dansk Skibsfinansiering Wheelock Marden & Co Ltd [1994] 2 HKC 264 at 269.

51. If there is to be compliance with a Mareva order disclosure provision it must be a virtually complete compliance.  In the event that there is any limitation in the compliance that limitation must be properly and satisfactorily explained to the court in order that the court may be sure that that limitation arises for genuine reasons.  It is appropriate to apply Tuckey JA’s expression: the disclosure must be made in good faith and disclosure of an extent that can fairly be judged to be full disclosure.  It must not be illusory.

Has there been non-compliance

52. It is not open to Cheung Fat to contend that Ou 1^st constitutes compliance with either disclosure order.  Ou 1^st has been found not to constitute compliance.

53. In respect of Ou 2^nd and Ou 3^rd, a number of complaints can be raised.  These include the following:

54. The whole of the relevant bank statements have still not been disclosed.  In respect of its bank accounts, which are alleged to be Cheung Fat’s only assets, only selected details are given based upon Mr Ou’s recollection and selected bank statements.

55. Mr Ou says there are only a very small quantity of bank statements in Cheung Fats possession.  It was not until 14 April 2014, the date for compliance with the unless order, that the banks were formally requested to supply copies of the bank statements.  It is no answer to the requirement of disclosure to say, after such a long period, that Cheung Fat does not have the statements.

56. In Ou 3^rd, bank statements obtained from HSBC and the Bank of East Asia (BEA) were finally disclosed.  The BEA statements were provided to Cheung Fat on 23 April 2014, but were not disclosed until 12 June 2014 in Ou 3^rd.  The HSBC statements were provided on 10 June 2014, and again not disclosed until 12 June 2014.

57. In Ou 3^rd it is asserted that a request for bank statements from BoC (G) was sent to Bank of China Hong Kong who directed that it was to be referred to BoC (G).  I was told from the bar, without any evidence whatsoever to support the assertion, that the Bank of China Hong Kong have informed Cheung Fat’s solicitors that BoC (G) takes the view that it does not have to comply with an order from a Hong Kong court.

58. Notwithstanding Cheung Fat’s admission that it had received very substantial sums from Central Steel over a very short period in the middle of 2013, no attempt is made to provide company books of account recording the receipt of those sums or how they were dealt with.  It is simply incredible that a company receiving such very substantial sums of money would not have proper books of account to record the passage of funds that it has handled.  It is remarkable that a company whose most recent tax return indicates that it is a “dormant company” should, in the space of just one month, have conducted transactions entitling it to payments in excess of HK$1 billion. If it were dormant, then the books would have to be reconstituted only in respect of the very short period during which the payments were apparently received and then distributed.

59. The mere assertion that the funds received have been used to pay suppliers is plainly an insufficient answer to the disclosure requirement.  I have no doubt at all that Cheung Fat would be endeavouring to operate its business on a profitable basis, and consequently the whole of the funds received from China Metal is highly unlikely to have gone to suppliers.  At the very least, Cheung Fat has failed in its obligation to disclose what has happened to that portion of received funds which have not been used to pay suppliers.

The issue of confidentiality:

60. An essential part of the disclosure orders was the tracing requirement set out in §23 above.  The extent of the requirement for tracing was extended in the second disclosure order.

61. In Ou 2^nd Cheung Fat adopts the position that it is unable to make disclosure in respect of the monies received from China Metal because those monies were used for payment for goods to suppliers, and that Cheung Fat owes a duty of confidentiality to those suppliers.  In Ou 3^rd it is asserted that the suppliers have not responded to signify their agreement to disclosure.  Concern is expressed that China Metal will harass the suppliers by unreasonable and oppressive means.

62. Mr Hui did not cite any authority for the proposition that in the ordinary course of business of a usual sale and purchase, a purchaser of goods owes a duty of confidentiality of the identity of the supplier of those goods.  It is right of course that the list of suppliers will be confidential to Cheung Fat, but that is no answer to the requirement that the list should be disclosed.  No documentation, not even an invoice from a supplier, was produced demonstrating the existence of any sort of confidentiality agreement between parties.

63. In the absence of any evidence of any agreement as to confidentiality between Cheung Fat and its suppliers, confidentiality is no basis upon which to refuse disclosure.  Even if there was a confidentiality agreement, that would not save Cheung Fat from the disclosure requirement.  Mr Hui did not attempt to suggest that a confidentiality requirement would override court ordered disclosure.  Finally, any concern that Cheung Fat might have about China Metal’s use of the information is properly protected by the implied undertaking that documents provided during disclosure cannot be used for any other purpose.

Conclusion as to compliance with the unless order

64. Although a list of documents on discovery which might be subject to substantial criticism as to adequacy still constitutes a list and therefore potentially an answer to an unless order, the same cannot be said of the three Ou affirmations in answer to the disclosure requirements.

65. Ou 1^st was plainly late, and Cheung Fat did not even attempt to suggest that it might have met the disclosure obligations.  Ou 2^nd was filed at the last minute, and again, Cheung Fat does not attempt to suggest that it might have met the disclosure obligation.  If it had, there would have been no need to file Ou 3^rd, which goes some way to meeting the disclosure obligation.  In Ou 3^rd, partial disclosure is made, but the essential bank statements, into which the funds were received by Cheung Fat, the BoC (G) account, remain undisclosed.  In that affirmation a deliberate decision not to disclose on the basis of confidentiality is asserted.

66. Cheung Fat has had 10 months in which to either obtain the bank statements from BoC (G), or to produce its company books, or if the books are missing to have accountants reconstruct them.  The only explanation offered for the absence of the bank statements, which were only sought from the bank on the last day for compliance with the unless order, is an unsubstantiated assertion from the bar that BoC (G) does not consider itself bound by a Hong Kong court order.  The fallacy of the assertion lies in the fact that it is not a court order that requires BoC (G) to produce a statements, but an instruction from its own client.  No proper explanation is offered as to why the bank should not observe an instruction from its own client.

67. In any event, BoC (G) is a branch of a Hong Kong bank, and that bank, being a Hong Kong bank, in Hong Kong, must be amenable to the jurisdiction of the Hong Kong courts.  BoC Hong Kong cannot hide from the consequences of a court order or the instruction of its client on the basis that its subsidiary branch is not resident in Hong Kong.

68. Cheung Fat has had more than enough time to seek from BoC (G) the relevant statements.  If faced with a refusal based upon the assertion that BoC (G) is not bound by the Hong Kong order, has had more than enough time to take steps in Hong Kong against the Hong Kong parent company of the bank holding the statements to compel production of the statements.

69. I have rejected confidentiality as a basis for non-compliance with the disclosure orders.  In this case it is plain that Cheung Fat has made a considered and deliberate decision to rely upon confidentiality is a reason for nondisclosure.

70. In Realkredit, Tuckey JA said:

“Both counsel conceded, rightly in my judgment, that a court could infer the lack of good faith where it was obvious from patent deficiencies in the list that who had been prepared in apparent but not real compliance with the obligation to give discovery.”

71. I am satisfied from the procedural history of this matter, and from the contents, or rather the lack of content, of Mr Ou’s affirmations that Cheung Fat has set out, in bad faith, deliberately and cynically to frustrate the Mareva injunction disclosure orders and to avoid disclosing the required information.  The deficiencies in this disclosure are monumental.  A patently false explanation is offered for the failure to disclose the most important of the relevant bank accounts.  The contention that the documents required to make disclosure are confidential is quite unsupported by any evidence.  When faced with the sanctions summons, directions were sought solely for the purpose of further delaying the requirement to meet the order.

72. I am satisfied that no real or proper attempt has been made by Cheung Fat to meet the disclosure obligation.  It cannot even be argued that there has been substantial compliance with the disclosure obligation.

Does the disclosure by the bankers save the day?

73. As is seen from the chronology, on 13 October 2013, in the presence of Cheung Fat’s solicitors, Anthony Chan J granted disclosure orders against Cheung Fat’s bankers.  Those disclosure orders have successfully provided China Metal with some of the relevant bank statements.  Mr Hui sought to argue that that disclosure met Cheung Fat’s obligations.

74. The fact that China Metal has obtained those bank statements does not, in my view, assist Cheung Fat. 

75. First, the obligation is on Cheung Fat to make the disclosure.  If it happens that by some other means, the beneficiary of the disclosure order learns some of the information required to be disclosed, that cannot discharge the obligation to make disclosure.  It may be that the mere making of disclosure pursuant to the order against the party, might constitute powerful evidence which may be deployed against that party at trial.  It may be that the information obtained from some other source will permit a serious attack on the credibility of the disclosing party if the disclosure may be shown to be false or incomplete.

76. Second, even if all of the bank statements had been supplied under the bankers disclosure they would not, alone, be sufficient to meet the tracing provisions because while the bank statements might disclose money passing out of the accounts the statements would not necessarily disclose to which other accounts or persons the money was paid.

77. In any event, in the absence of the BoC (G) bank statements, the orders against the bankers have not succeeded in providing China Metal with all of the information it was entitled to receive from Cheung Fat by way of disclosure.  The disclosure remains seriously incomplete.

Relief from the consequence of breach of the unless order

78. The law is clear that where a party fails to comply with an order, any sanction for failure to comply imposed by the order takes effect: O.2, r. 4; see also Daimler AG v Leiduck [2012] HKLRD 119 (CA) at §44, and Marcan Shipping (London) Ltd v Kefalas & Anor [2007] 1 WLR 1864 CA.  The consequence is that on 14 April 2014, the sanction took effect, and unless Cheung Fat obtains relief from the sanction under Order 2, rule 4, the sanction has effect.  That order requires that relief be obtained within 14 days of the failure.

79. Mr Hui, in my view incorrectly, described the summons seeking relief as being a summons “to oppose” China Metal’s judgment application.  It is not an opposition summons.  It is an application for relief from a sanction that had taken effect.

80. The unless order required that disclosure be made by 14 April 2014.  I have found that that disclosure was not made and that consequently Cheung Fat was in breach of the order.  The failure does not occur upon a finding by the court that there has been a failure.  The finding merely recognises the situation as it was on 14 April 2014.  Cheung Fat was in breach of the order of 40 in April 2040.

81. The decision not to make full disclosure based upon the confidentiality contention was plainly a considered and deliberate decision.  It was a decision not to make full disclosure.  Where a party knows that the disclosure will not meet the requirements of an unless order it is incumbent upon that party to immediately apply for relief, and obtain that relief before it is in default of the order.  A party cannot and should not wait and see whether or not steps are taken to enforce the sanction contained in the unless order and only then seek relief. 

82. Under O. 2, r. 4, the relief must be sought and obtained within 14 days of the failure.  Accordingly, relief from the consequences of the breach of the unless order had to be sought and obtained on before 28 April 2014.  It was not until 12 June 2014, six weeks after the breach, and only five days before the hearing of the sanctions summons, that the relief summons was filed.  This is yet a further example of the attempts by Cheung Fat to continually stretch the time within which it must take any steps.

83. No application for an extension of time to seek relief was sought by Cheung Fat, either by way of summons, or orally at the hearing.  The application for relief is out of time. But the substance of the application is of greater significance, and, although it is open to me to refuse relief simply because of the delay, I do not decide the matter on time point.

84. The basis for granting relief from sanctions

85. In determining whether or not court should grant relief from sanctions the court must, pursuant to O. 4 r 5, consider all the circumstances including the ten matters set out in that rule.  It is proper also to have regard the following seven matters set out in Hytec Information Systems Ltd v Coventry City Council [1997] 1 WLR 1666 (CA):

- An unless order was an order of last resort, not made unless there was a history of failure to comply with other orders.  It was the party’s last chance to put its case in order.

- Because it was the last chance, a failure to comply would ordinarily result in sanctions being imposed.

- The sanction was a necessary forensic weapon which the broader interests of the administration of justice required to be deployed unless the most compelling arguments were advanced to exhilarate the failure.

- It seemed axiomatic that if a party intentionally flouted the order he could expect no mercy.

- A sufficient exoneration will almost invariably require that he satisfied the court that something beyond his control had caused the failure.

- The judge would exercise his judicial discretion whether to excuse the failure in the circumstances of each case on its own merits, at the core of which was service to justice.

- The interest of justice required that justice should be shown to the injured party for procedural inefficiencies causing the twin scourges of delay and wasted costs.  The public administration of justice to contain those blights also weighed heavily.  Any injustice to the defaulting party, though never to be ignored, came a long way behind the other two.

86. This is a prime example of an unless order being an order of last resort.  There was a demonstrable history of failure to comply with the orders and it must have been clear to Cheung Fat that this was its last chance.  Ordinarily, the sanction would be imposed.

87. It cannot be said that the arguments advanced to exonerate the failure are in any way compelling.  The importance of a Mareva injunction and associated disclosure orders as a means by which the court may protect funds to ensure that a judgment is met cannot be overstated.  I have found in this respect of that disclosure orders fall within a quite different category than discovery where specific provisions exist to assist incomplete disclosure.

88. I have found that the failure to make disclosure was in bad faith, and undertaking deliberately and cynically to frustrate the Mareva injunction disclosure orders. This was an intentional flouting of the orders.

89. It cannot be said that the failure of Cheung Fat to properly maintain its books is a matter beyond its control which might excuse the failure to disclose.  The suggestion that the company’s books of account have not been properly maintained and that Cheung Fat is thereby frustrated in making proper disclosure did not arise until Ou 3^rd. If the statement is true, the fact of incomplete books must have been known to Ms Zhong right back in July 2013, when the disclosure orders were first served.  Up until Ou 3^rd, the excuse being offered was simply that full sets of the bank statements were not available.  There has been more than enough time not only to get full sets of the bank statements from all banks, but also to reconstruct the books of account.

90. In the exercise of my discretion I have regard to all of the foregoing factors in determining whether I should excuse the failure in the circumstances of this case.  I have had particular regard to the purpose of Mareva injunctions and their associated disclosure orders.  I have weighed carefully any injustice that might flow to Cheung Fat against the interests of justice requiring that justice should be shown to China Metal for the procedural inefficiencies on the part of Cheung Fat which have caused delay and wasted costs.

91. Weighing all of these matters, I am satisfied that this is a plain case where relief should not be granted.  Relief is accordingly refused.

92. The strike out summons

93. Although the rule (O. 18, r. 19) specifically states that an application to strike out may be made at any stage of the proceedings the application should always be made promptly and as a rule before the pleadings are closed: Hong Kong Practice 18/19/3.  This application is made after the close of pleadings (O. 18, r. 20: 14 days after service of the reply on 14 February 2014; thus 28 February 2014), and cannot by any means be said to have been made promptly.

94. Ms Sit correctly reminded me that no evidence is admissible on an application to strike out upon the ground that no reasonable cause of action is disclosed.  On this aspect of the application the allegations in the statement of claim are assumed to be true, and an assessment is made as to whether a cause of action is disclosed. 

95. I have not the slightest doubt that the allegations in this statement of claim against both Mr Chun and Cheung Fat disclose proper causes of action.

96. Although the strikeout summons was set down to be heard before me, Mr Hui elected, as I understood him, not to address me on how the statement of claim might constitute circumstances that were either frivolous or vexatious or an abuse of the procedure of the court. He preferred to say that the summons should be adjourned for further directions.  There is simply no need for further directions.  There was nothing whatsoever in Mr Ou’s three affirmations, or on the face of the statement of claim, from which it might be said that there was any evidence to suggest that the proceedings fell into any of those three categories.

97. Mr Hui did not pursue the application in the strikeout summons to vary the amount frozen by the Mareva injunction.

98. The strikeout summons is accordingly dismissed in its entirety.

Conclusion on the sanction summons

99. I am satisfied that non-compliance with the unless order has been established and that there is no basis upon which I should grant relief against sanction.  There will accordingly be an order that the defence and counterclaim of Cheung Fat be struck out, and Cheung Fat be debarred from defending the proceedings.

Should judgment be entered?

100. The sanction summons sought not only that the defence be struck out, but also that judgment be entered against Cheung Fat.

101. No matter how Ms Sit tried to express it, it was quite plain that the case against Cheung Fat is entirely dependent upon the establishment by China Metal of its case against Mr Chun, namely that the transactions between Central Steel and Cheung Fat were false and fictitious.  This dependency gives rise to two issues.

102. First, despite the evidence presently available, I cannot discount the remote possibility that Mr Chun might be successful in resisting the claim.  If he were successful in resisting the claim, then any judgment against Cheung Fat would likely also have to go.  In those circumstances I consider that the formal entry of judgment should wait until the trial has taken place and the claim against Mr Chun properly proved.

103. Second, a claim that is based upon an allegation that transactions are false and fictitious is in effect a claim based on an allegation of fraud.  I have had regard to the decision of the Court of Appeal in Pacific Electric Wire & Cable Co Ltd v Harmutty Ltd [2009] 3 HKLRD 94.  Where an allegation of fraud remains outstanding, as it does here, I am of the view that the court should not, except in the plainest of cases, enter a judgment against a defendant where the establishment of that fraud is essential to the proof against that defendant, without a trial and appropriate proof of the allegation.  This is not such a plain case.

104. I accordingly decline to enter judgment against Cheung Fat.

Costs:

105. There will be an order nisi that Cheung Fat must pay China Metal’s costs of the sanction summons, the relief summons and the strike out summons on an indemnity basis.