XCHRX CENTURY FIRST INVESTMENTS LTD. and Others v. LUNG PING and Others

1995, No. A4925

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H E A D N O T E

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MAREVA INJUNCTION - MATERIAL NON-DISCLOSURE - INJUNCTION DISCHARGED - APPLICATION FOR A RE-GRANT OF INJUNCTION REFUSED.

1995, No. A4925

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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D E C I S I O N

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The Application

1. The 1st Defendant herein applied to discharge the Mareva injunction obtained ex parte by the Plaintiffs. The 2nd Defendant resisted the Plaintiffs' inter parte summons to continue the ex parte injunction order. In the end, both the 1st and 2nd Defendants asked for the discharge of the injunction on the ground of material non-disclosure.

2. The Plaintiffs' case is based on the allegation of fraud and conspiracy of the 1st and 2nd Defendants in obtaining US$1.9 million for the 3rd Defendant, a limited company.

Background

3. The 1st Plaintiff are represented by four directors : Cheng Ping Fui, ("Cheng"), C.K. Chen, H.H. Chen and one New Pacific International Limited, a company controlled by Su Jung Ren. Cheng Ping Fui is a director of both the 2nd and 3rd Plaintiffs. The negotiation between the Plaintiffs and the 3rd Defendant were basically made between Cheng and the 1st Defendant.

4. The Plaintiffs claimed that the 1st Defendant on behalf of the 3rd Defendant signed a joint venture agreement with one SPI in Shanghai for a redevelopment project in Shanghai. The Plaintiffs agreed to invest and participate in the Shanghai project by becoming a shareholder of the 3rd Defendant and putting up the necessary funds. The 1st Defendant would be responsible for looking after the Shanghai project.

5. Between 28 to 30 September 1994, the Plaintiffs deposited a total sum of US$2.07 million into the 3rd Defendant's US savings account. Thereafter on 3 October 1994, Cheng and the 1st Defendant caused a sum of US$1.9 million to be transferred from the 3rd Defendant's US dollar accounts in Hong Kong to the US dollar accounts in Shanghai with the same bank (Bank of East Asia "BEA").

6. In January 1995, the Plaintiff decided to withdraw from the investment agreement. The Plaintiffs claimed that the 1st Defendant had accepted the Plaintiffs' decision and the investment agreement was thereby terminated. On 26 January 1995, Cheng and the 1st Defendant withdrew from the 3rd Defendant's bank account in Wanchai all sums remaining therein namely, the sums of US$162,623.22 and HK$621,508.00. These 2 sums were given to Cheng. The Plaintiffs therefore claimed that the 3rd Defendant continued to hold in trust for the Plaintiffs the sum of US$1.9 million together with any bank interest accrued thereon in the Shanghai branch account.

7. The Plaintiffs alleged that without the knowledge and consent of the other directors of the 3rd Defendant, namely Cheng, C.K. Chen and H.H. Chen, the 1st and/or 2nd Defendants have done the following things, namely :

(1) They filed with the Company Registry on 23 September, a Notice of Appointment of 2nd Defendant on 18 August 1994 as director of the 3rd Defendant.

(2) They delivered to the Shanghai branch of BEA, a mandate dated 12 October 1994, falsely certifying that the 3rd Defendant had passed a resolution by the Board of Directors authorising the 1st Defendant singly to operate the 3rd Defendant's bank account.

(3) On 18 October 1994 and again on 6 January 1995, they pledged the deposit at the Shanghai branch US dollar account to secure repayment of money then owing and became owing to the bank by the 3rd Defendant.

(4) They withdrew or cost to be withdrawn all money in the 3rd Defendant's bank account with the Shanghai branch of BEA.

(5) They filed with the Company Registry on 12 January, a return of allotment of shares dated 7 January 1995 as follows :

Allottee	No. of shares
2nd Plaintiff	7,000
3rd Plaintiff	14,000
1st Defendant	69,000
Total :	90,000

(6) They filed a special resolution with the Company Registry on 21 January 1995, which was purportedly passed at an extraordinary general meeting of the 3rd Defendant held on 13 January to remove C.K. Chen and H.H. Chen as directors of the 3rd Defendant.

8. The 1st Defendant filed a number of affirmations explaining how the monies were spent or withdrawn at the direction of Cheng with his full knowledge and consent. I would not go into the details of the case of each party as disclosed on affidavit. Otherwise, it would turn into an analysis of the case on each side by way of a mini-trial which I should avoid at this stage of the proceedings. The least to be said at this stage is the better. Suffice it to say that the Defendants' case in discharging the injunction is basically based on the ground of material non-disclosure.

9. Cheng did not disclose that in fact the 1st Defendant was his mistress. There was an amorous relationship between them. The 1st Defendant produced a number of forceful evidence including a number of cheques evidencing unexplainable payments from Cheng to the 1st Defendant. Hotel bills indicated that Cheng had stayed in the same room with the 1st Defendant when they were in Shanghai. Affirmation of the caretaker of the 1st Defendant's residence at Tung Shan Terrace revealed that Cheng had stayed overnight at the 1st Defendant's flat in Tung Shan Terrace for a few times. The aforesaid was eventually admitted by the 1st Defendant.

The legal position

10. The test of materiality is not whether such fact, if disclosed would have resulted in a different decision, but rather whether it is relevant to the weighing operation which the Court has to make in deciding whether or not to grant the order. (See : Thermax Ltd. v. Schott Industrial Glass Ltd. [1981] FSR 289; Citibank N.A. v. Express Ship Management Services [1987] HKLR 1184.)

Fuad, J.A. in the Citibank case says at 1190C-E :

"The cases show what are to be regarded as material facts in this context : 'all facts that are relevant to the weighing operation which the Court has to make in deciding whether or not to grant the order' : per Browne-Wilkinson, J. (as he then was) in Thermax v. Schott Industrial Glass [1981] FSR 289, 298. His test has been applied in several cases. I found the decision of Goulding, J. in Wardle Fabrics Ltd. v. G. Myristis Ltd. [1984] FSR 263 to be particularly helpful for in that case the judge emphasized that the correct test is not simply whether, if the non-disclosure had not occurred, the ex parte judge would, nevertheless, have made the order, but whether the facts not disclosed, being relevant, should have been in the scales." [word underlined for emphasis only]

Fuad, J.A. also says at 1190H-J :

"While the Courts must be vigilant and insist that full and frank disclosure be made in grounding affidavits for ex parte applications for injunctions, Anton Piller orders etc., it is essential to bear in mind the true principle upon which this rule is based. Unless the Courts use the sanctions which the practice gives them only when the non-disclosure is of facts which are relevant to the ex parte judge's 'weighing operation', an impossible burden would be placed upon applicants and their advisers, and affidavits, ex abundanti, will tend to contain all sorts of facts and exhibits which are not really necessary for the proper exercise of the Court's discretion when ex parte relief is sought."

Macdougall, J. at 1191J-1192B says :

"... it would be unfortunate if it were to be thought that in laying down the very sensible and necessary principles concerning disclosure of all material facts, the Courts have intended to give active encouragement to undeserving defendants to search ingeniously for facts which a plaintiff might innocently have failed to disclose, in the hope that a judge may consider them to be material and so discharge the injunction. Commonsense must prevail. The heavy burden cast on a plaintiff must not be allowed to become so onerous as to be intolerable."

11. The exact relationship between the 1st Defendant and Cheng being the person representing the Plaintiffs in all respects including investigation of legal proceedings must be a relevant factor in the weighing operation of the respective cases of the two parties. I accept the Defendants' submission that this factor is particularly relevant when the Plaintiffs' case is based on allegations that everything was done without the Plaintiffs' knowledge. Cheng affirmed that he did not know any of the transfer and withdrawal. The ex parte judge is obviously entitled to know the exact relationship between Cheng and the 1st Defendant. The fact that in the past, Cheng was in the habit of paying substantial amount of money including an amount of HK$2 million to the 1st Defendant must be a relevant factor in the weighing operation in this case. (There is of course a dispute as to the purpose of this payment). But admittedly Cheng's last payment of "gift" by way of cheque was as late as January 1995.

12. Further, the cumulative effect of all material non-disclosures at the ex parte hearing must be a relevant factor in the weighing operation. I shall summarise them as follows :

(1) Cheng did not disclose to the ex parte judge that in the O.14 proceedings in the first action (HCA No.A2372/95), he had swore an affirmation confirming the truth of the content of the Statement of Claim. This Statement of Claim is now said by him to contain a number of important factual errors.

(2) Cheng failed to disclose to the ex parte judge the amount and the extent of inconsistencies existed between the Statement of Claim in the first action and in the second action now before me.

(3) Cheng did not disclose to the judge the fact that the O.14 proceedings in the first action was withdrawn by the Plaintiff and the 1st Defendant was preparing to strike out the Statement of Claim in the first action.

(4) Cheng said that the 1st Defendant on 2 September 1994, faxed the copy of the joint venture agreement to him and he did not have any knowledge of the signing of the joint venture agreement on 2 or 3 September 1994. He said he was not present at the signing of the agreement in Shanghai. But at that material time, it turned out to be a fact (which he did not deny) that he and the 1st Defendant were in Shanghai staying in the same hotel room together. Although Cheng still denied that he was present while the actual signing of the agreements occurred or any knowledge of the same before hand, this must have cast a lot of doubt on his original version. At least at this stage the fact that he was with the 1st Defendant at that material period, sharing the same room and they flied back to Hong Kong in the same plane must be material non-disclosure in the circumstances of this case.

(5) Cheng said according to his information as at 8 March 1995, the balance of US$20,000 odd remaining in the 3rd Defendant in Shanghai on 20 February 1995 had been completely withdrawn. This was meant to impute that the 1st Defendant is a fraudster. The evidence produced by the 1st Defendant was that this amount was still intact in the Shanghai account.

(6) Cheng initially put forward the case that he did not know the 1st Defendant's residence. This was meant to impute that the 1st Defendant might abscond or disappear at any time. After the 1st Defendant said that Cheng, in fact, knew and had been at her residence three or four times and stayed overnight for about two times, Cheng eventually agreed that he had been there but said that he had forgotten about the exact address and he was told by the 1st Defendant that it was her father's property.

13. I must say that I read Cheng's affirmations with some senses of uneasiness. For instance, Cheng tried to explain why he did not marry his Taiwanese common law wife. Cheng said he had four women in the past. His relationship with the first wife ended up in divorce. His second wife had died. Then he was told by a fortune teller that he should not associate with any woman with the element of "dragon". He said that his third Taiwanese common law wife was born in the year of the dragon and that is why he did not marry her. He then said :

"I now realise that the surname of the 1st Defendant is 'Lung' and 'Lung' in fact in Chinese means dragon."

In explaining why he did not marry his third woman he was perhaps at the same time also trying to explain why he now got into trouble as the 1st Defendant is called "Lung Ping" (which literally means "Dragon Ice") and accordingly, as his belief goes, he was in fact being cheated by such a woman and therefore the 1st Defendant must be a fraudster. I find this absolutely unacceptable not because of the superstitious undertone. Cheng is a Chinese and therefore "Lung" must always mean "Lung" to a Chinese as dragon means dragon to an Englishman. It is extremely puzzling why he could say it was only then he realised the surname of the 1st Defendant is "Lung" which means "dragon". Such knowledge must have been known to him from day one he knew the 1st Defendant. This is particularly odd in his case when he put forward a case that he does not understand English.

Should I regrant a fresh Mareva injunction?

14. Many issues are hotly disputed by the two parties. Because of those material non-disclosures of Cheng as stated above, I am not satisfied that there is a strong prima facie case of fraud against the two defendants. I am aware that in the case of Behbehani v. Salem [1989]1 WLR 723, it was decided that it is not for every omission that the injunction will be automatically discharged. A locus poenitentiae may sometimes be afforded.

"The court has a discretion, notwithstanding proof of material non-disclosure which justifies or requires the immediate discharge of the ex parte order, nevertheless to continue the order or to make a new order on terms.

'... when the whole of the facts, including that of the original non-disclosure are before [the Court, it] may well grant ... a second injunction if the original non-disclosure was innocent and if an injunction could properly be granted even had the facts been disclosed.' ... Whilst having regard to the purpose of the rule, the discretion is one to be exercised sparingly." (Per Woolf, L.J. at p.727.)

Woolf, L.J. also said at p.729 :

"However, if the court does not approach the question of the non-disclosure of material matters in the way that has been indicated in earlier decision, there will be little hope of solicitors [and I would respectfully add : and counsel] who are subjected to such pressures appreciating the importance of making full disclosure and, more important, bringing home to the clients the serious consequences of non-disclosure."

15. The 1st Defendant further submitted that there is no risk of dissipation of assets. There are three main items, namely : (1) a total of US$800,000 was transferred to one Zhi Hong Company (which was controlled by the 1st Defendant) pursuant to a joint venture agreement with SPI; (2) the Lai Wang City Properties in Guangzhou paid to the extent of a total sum of HK$5,678,406 (approximately US$734,000); (3) The aforesaid Tung Shan Terrace Properties which was purchased with some money paid by Cheng and the existing equity is about $3 million to $3.6 million.

16. I would not say there is no risk of dissipation of property but in all the circumstances of this case I do not think it is appropriate to regrant a fresh Mareva injunction.

Conclusion

17. In conclusion, I would discharge the ex parte injunction granted on 22 May 1995 and continued on 26 May 1995 both by J. Chan, J. I also refuse the Plaintiffs' application for a regrant of the same Mareva injunction. I shall now hear counsel's submissions on the question of costs and other incidental matters including security for costs for the Plaintiffs : the 1st Plaintiff is a British Virgin Island Company whereas the 2nd and the 3rd Plaintiffs are both limited companies with little capital. The question of fortification of the Plaintiffs' undertaking in damages would not arise in light of my decision unless the Plaintiffs are seeking a stay on my order pending appeal.