XIE LI XIN v. LAW KA YAN, THOMPSON

HCA 1476/2017

[2018] HKCFI 1096

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1476 OF 2017

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JUDGMENT

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A. INTRODUCTION

1.  By a summons dated 22 June 2017 (the “Summons”), the plaintiff Xie Li Xin (“Xie”) seeks to continue the ex parte Injunction Order granted by DHCJ Saunders [A1/229] on 20 June 2017, as amended on 22 June 2017 and re-amended on 13 July 2017 (the “Injunction Order”).

2.  The Injunction Order restrains:

(1)   by way of Mareva injunction, D1, D2 and D17 from removing from Hong Kong, disposing of, dealing with or diminishing the value of any of their assets which are within Hong Kong up to the value of HK$40,530,000;

(2)   by way of proprietary injunction, (a) D4 – D14 from disposing of or dealing with the Tin Shui Wai Properties (as defined below); (b) D15 from disposing of or dealing with any interest in the 20 mortgages dated 1 April 2016 over the Tin Shui Wai Properties; and (c) D16 from disposing of or dealing with any interest in the floating charge dated 15 August 2016 over the entire assets of D20.

3.  Only D1 contests the Injunction Order at this stage.  The other defendants have apparently not yet been served—the reasons why have not been addressed at this hearing.  Xie seeks a continuation of the Injunction Order against the other defendants, recognising that the proceedings remain ex parte against them.

4.  Essentially, Xie claims:

(1)   that he is the victim of a fraudulent scheme orchestrated by D1 (“Law”), D2 (“Ngai”) and D3 (“Tong”) (together, the “Individuals”),[1] who used D4 – D17 as their nominees in perpetrating the fraud.

(2)   that the Individuals fraudulently induced Xie to invest HK$41,500,000 in a purported money lender business which was in fact a scam.

(3)   that the loans purportedly created under the business are no more than devices to siphon off the monies injected by Xie to the Individuals or their nominees.

(4)   that the fraud was uncovered by Xie in August 2016 when, abruptly:

(a)the Individuals cut ties with the corporate structure carrying on the purported money-lending business by resigning as directors and transferring away their shareholding in the money-lending business to some unknown third parties and since then essentially going incommunicado; [2]

(b)the mortgages held by Future Profit under the purported business were transferred to an unknown third party (namely D15 (“On Dragon”)) for apparently no consideration;

(c)an all-monies floating charge was created over the assetsof Future Profit in favour of another unknown third party (namely D16 (“Superhero”)) for reasons which are wholly unclear; and

(d)the bank account of Future Profit was emptied.

(5)   that as a result, Xie’s investment in the purported business (in the form of shares and shareholder’s loans) was deprived of any value.

5.  By contrast, Law (D1) claims:

(1)   He was a co-investor of Xie in the money-lending business.  

(2)   Not long after the commencement of business, the relationship between Xie and Law broke down, as a result of which Law cashed out his share of the business.

(3)   Regrettably, Law’s decision to exit caused Xie to come up with a distorted, if not outright false, re-characterization of past events.   

6.  The evidence filed on the Summons is:

(1)   For P at the ex parte stage: Xie 1 dated 22 June 2017;

(2)   For D1: Law 2 dated 24 October 2017; and

(3)   For P: Xie 2 dated 12 January 2018.

7.  Further evidence application:

(1)   By a summons dated 27 March 2018, Xie sought leave to file further evidence in support of the Summons relating to: (i) alleged attacks and threats of violence committed against Xie, his family and his colleagues at his office in August and September 2017; (ii) an omission of an insurance policy in Law’s disclosure affirmation filed on 28 July 2017; (iii) WeChat voicerecordings contained in the WeChat messages between Xie and the Individuals, and the transcripts of the recordings.

(2)   As to (i), there was nothing to tie the allegations to these proceedings; as to (ii) it was a de minimis matter; and as to (iii) there was no reason why such evidence was not filed earlier.

(3)   At the outset of the hearing, the summons was dismissed with costs.

B.  INJUNCTION: BASIC PRINCIPLES

8.  There is no dispute as to what must be established in order to obtain a Mareva order: a plaintiff has to show that (a) he has a good arguable case on a substantive claim; (b) there are assets within the jurisdiction; (c) there is a real risk of dissipation of assets or removal of assets from the jurisdiction which would render the plaintiff’s judgment of no effect; (d) the balance of convenience is in favour of granting the injunction.  See Hong Kong Civil Procedure 2018, §29/1/65.

C.  GOOD ARGUABLE CASE

(a)The facts

9.  In August 2014, Xie met Law at a social function.  In April 2015, Law introduced Ngai (D2) and Tong (D3) to Xie during a holiday trip to Korea.  Xie and the Individuals (Law, Ngai and Tong) became friends.

10.  Between late 2015 and 8 February 2016, Xie and the Individualsagreed to set up a new money lender company focusing on mortgage-related business in Hong Kong (the “Money Lender Business”).

11.  They agreed a structure whereby:

(1)   They would be shareholders in a holding company Polly Wealth International Investment Limited, a Seychelles company (“Polly Wealth”), which would own 100% of Superlative Goal Corporate Development Limited, a Seychelles company (“Superlative Goal”) which would in turn own 100% of Future Profit Development Limited, a Hong Kong company (“Future Profit”).  Future Profit would be the operating company.  Together, these companies are referred to as “the Group”.

(2)   Ngai would be responsible for the day-to-day operations of Future Profit in approving and making loans to customers.

(3)   Each of Xie and Law would be 35% shareholders, with Ngai being a 20% shareholder and Tong being a 20% shareholder (“the Shareholders”).

12.  They entered a written shareholders’ agreement dated 13 February 2016 (“Shareholders’ Agreement”).  It provided that:

(1)   The board of directors of Polly Wealth would consist of the Shareholders, with Ngai acting as its Chief Executive Officer, and Xie and Law acting as Co-Chairmen.

(2)   The board of directors agreed that Ngai would be responsible for the day-to-day operation of Future Profit and approve all loan applications, in return for which Ngai would receive a monthly stipend of HK$10,000.

(3)   Board meetings would be held once a month wherein Ngai should report to the board of directors the performance of the companies within the Money Lender Business in the past month.  

(4)   The Money Lender Business would initially be funded by (a) capital of HK$78,000 divided into 10,000 shares to be paid up in proportion to the shareholdings; (b) a first tranche shareholders’ loan of HK$9,922,000 shares to be paid in proportion to the shareholdings (“1^st Tranche Shareholders’ Loans”) and (c) a second tranche shareholders’ loan of HK$30,000,000 to be paid by Xie as to HK$25 million and by Law as to HK$5 million (“2^nd Tranche Shareholders’ Loans”).  

(5)   If the Money Lender Business required further funds for its development, Ngai could convene a meeting of the board of directors to discuss the raising of further funds.

13.  On 5 March 2016, pursuant to the Shareholders’ Agreement, theShareholders met and discussed a business opportunity, whereby Tam Chi Fai (“Tam”) and Target Way Property Development (“Target Way”) sought to borrow HK$25 million to be secured by way of mortgage over 3 Sai Kung properties (the proposed “Sai Kung Mortgage Loan”).  The Shareholders conducted a site visit of the Sai Kung properties in question.  Later in the daythey agreed to advance a third tranche shareholders’ loan of HK$25,000,000 (“3^rd Tranche Shareholders’ Loans”) for the purpose of exploiting the Sai Kung Mortgage Loan opportunity.  They agreed that Xie would advance HK$19 million, Law HK$5 million, Ngai HK$1 million, and that Ngai would get lawyers to draft documents, and estimated that they would sign a contract with the borrower the next Monday.

14.  On 19 March 2016, Ngai convened a board meeting and reported to the other Shareholders the development of the Money Lender Business [3]. At the meeting, Ngai stated that:

(1)   The Money Lender Business had identified suitable borrowers, and it would be a suitable time for the Shareholders to inject their Shareholders’ Loans into the Money Lender Business.

(2)   While the precise detail of the meeting is disputed, it is not disputed that:

(a)the Sai Kung Mortgage Loan was mentioned and discussed at the meeting.

(b)Ngai also explained how two companies, Win Top Investment Holdings Limited (“Win Top”) and Central Impulse Limited (“Central Impulse”), had now become subsidiaries of Polly Wealth and could be used for tax planning and asset protection purposes.  In particular, it was proposed that Central Impulse was to have a first charge over Future Profit with the intention of protecting the assets of the Money Lender Business from potential third party claims (“Asset Protection Charges”).

15.  Later on 19 March 2016, Ngai, on behalf of the board of Polly Wealth, issued a written instruction (“Written Instruction”) to all Shareholders requiring the injection of the start-up capital and the Shareholders’ Loans into the Money Lender Business.

16.  On 26 March 2016, Xie starting asking questions in the WeChat group between the Shareholders in respect of security of the Shareholders who had made loans.  Ngai asked Xie if he wanted the borrowing company to change to be owned only by Xie and Law, but Xie said that was not necessary.  Ngai stated that lawyers were drafting documents in respect of the shareholders’ loans, and suggested a meeting with the lawyers to raise suggestions and concerns, to make sure everyone felt comfortable with a view to long term development of the company. Ngai stated that in addition to the HK$65 million raised, they only needed another HK$30 – 40 million for him to feel confident about the possibility of an IPO.  He stated capital could be raised from outsiders as well as the shareholders.

17.  Also on 26 March 2016, Xie messaged Law privately to say theyneeded to seriously consider the feasibility of the company. Law responded in respect of the feasibility of the company, the possibility of getting listed, and on Ngai’s ability to make it happen.  Law stated why he had confidencein Ngai.  Law suggested that Xie meet the lawyers to understand the company structure and see if there were potential risks.  Law also set out a possible exit plan in case the company’s development did not go as planned. [4]

18.  On the same day, Xie informed Law that his own business planshad not gone as expected, so his cashflow was not as expected, and he had to sell bonds to get his funds together.

19.  From late March to early April 2016, the Shareholders advanced the start-up capital as well as 1^st and 2^nd Tranche Shareholders’ Loans to the Money Lender Business.  Between 21 and 26 March 2016, mortgage loan agreements were entered between Future Profit and D4 – D14 as borrowers whereby Future Profit advanced a total of HK$33 million.  Mortgages were executed on 1 April 2016 to secure those loans against 20 sub-divided parts of what was originally one shop (“Tin Shui Wai Mortgage Loans”).

20.  As to the 3^rd Tranche Shareholders’ Loans for the proposed Sai Kung Mortgage Loan:

(1)   On 1 April 2016, Xie told Ngai that he would need to borrow funds to meet the HK$19 million instalment and asked if the payment could be postponed for a few days.  He also asked that they go to a lawyer to discuss contract issues.  Xie asked if Law could lend HK$19 million, and Xie lend HK$5 million.

(2)   On 1 – 4 April 2016, Ngai stated that he was trying to delay the drawdown date on the Sai Kung loans.

(3)   On 7 April, Ngai stated that the borrower had entered other agreements with effect from 9 April, so he could not accommodate a 13 April drawdown.  Ngai asked if the Shareholders could raise funds by the next day.  Xie replied that he could not.

(4)   On 8 April, Law informed the Shareholders he had been told by Ngai that the company had lent about HK$30 million and had about HK$6 million remaining.  With HK$5 million from Xie, HK$5 million from Law, HK$1 million from Ngai, and HK$6 million from the company, that would be HK$17 million, leaving a shortfall of HK$8 million.  Law stated he could borrow HK$8 million to lend for a period of 2 weeks but would then have to repay it.

(5)   In response, Xie queried how the loans had been made without contracts.  Ngai clarified that all borrowers had signed contracts,they had been ordinary mortgage loans, and Hoosenally & Neo solicitors had drafted them; that there had been about 20 loans which had previously been approved and totaled about HK$33 million, with interest at 8%, creating a profit of about HK$2.6 million per annum.  Ngai added that the interest on the Sai Kung loan would also be at 8% and create a profit of HK$2 million per annum.  Xie replied that his concern was not income, but the deployment of funds in such a short time.  Ngai replied that he understood but that the funds had been confirmed after several meetings and only then did Ngai confirm the contract with the borrower.

(6)   Given the tight timeframe, it was agreed that Xie, Ngai and Law would pay their contributions to the 3^rd Tranche Shareholders’ Loans directly to the solicitors, Hoosenally & Neo.

(7)   On 8 April 2016, Future Profit as lender entered into a mortgageloan agreement with Tam and Target Way as borrower, and three other individuals as guarantors who put forward the 3 Sai Kungproperties as collateral.  The loan of HK$25 million was to bearan annual interest rate of 8% (the “Sai Kung Mortgage Loan”).

21.  Future Profit made the following advances:

(1)   On 31 March 2016, HK$33,029,978 in respect of the Tin Shui Wai Mortgage Loans;

(2)   On 8 April 2016, HK$25 million in respect of the Sai Kung Mortgage Loans:

(a)However, only HK$6 million was transferred directly from Future Profit.  The balance was transferred on behalf of Xie, Ngai and Law directly to Hoosenally & Neo.

(b)Unknown to Xie at that time, the HK$13 million advanced on behalf of Law came from the account of I-Luck Group (Holdings) Ltd (“I-Luck”), a company of which Ngai is sole director.  Law asserts that he had forgotten his company chop when he went to make payment, so Ngai’scompany I-Luck had made the payment on his behalf, and Law had repaid this amount later.  No evidence of such repayment of HK$13 million by Law to I-Luck or Ngai has been produced.

22.  It is not disputed that the Money Lender Business received interest payments on these loans, and in turn, the Shareholders received payment of interest on the Shareholders’ Loans each month.

23.  On 11 April 2016, the Shareholders attended the office of Hoosenally & Neo in order to receive advice as to how tax planning and asset protection purposes could be promoted by the use of Central Impulse and Win Top.[5]

24.  On 25 April 2016, Law contacted Xie about his need to repay the HK$8 million he had (he claims) borrowed from his company. Law told Xie that he had tried but not yet succeeded in finding outside investors.  After some back and forth, Xie agreed to lend HK$8 million to Law on terms that he receive the same interest as Law would receive from Future Profit.  Ngai provided a form of personal loan agreement, and Xie and Law made some amendments, then entered the personal loan agreement on 29 April 2016 (“the Personal Loan Agreement”). 

25.  Between May 2016 and November 2017, Law’s pre-signed post-dated cheques to Xie to pay monthly interest on the Personal Loan Agreement were honoured, save on one occasion.  In June 2017, one of the cheques was dishonoured, but Law arranged for funds to be wired to Xie.

26.  At a board meeting on 7 May 2016, Ngai proposed another business opportunity for the Group which would require an injection of either HK$30 million or HK$60 million (there is a conflict of evidence on this). Ngai produced diagrams to illustrate the opportunity.  Ngai stated that the loan to be made would attract a 12% interest rate and be secured.  In a privatemessage on 15 May, Law told Xie that he did not have enough funds to makethe investment and it depended on Xie; if Xie could not make the investment either then he should tell Ngai to stop the discussions with the other party.  On 16 May, Law posted in the group WeChat that he and Xie had discussed it and the company did not have enough funds so the project should be suspended.  Xie added that he could not provide any funds because of his office building costs.  Ngai asked if the shortfall in funds was large.  Xie suggested external funds be raised and he hoped the other shareholders were not expecting him to shoulder all the funds by himself.  Ngai responded that he understood.

27.  On 11 June 2016, a board meeting was held.  Xie informed the meeting that the sale of his own business had fallen through, giving him unanticipated cashflow issues and an inability to further fund the Money Lender Business[6].  Xie asked the other shareholders to sign directors’ undertakings (to the effect that they would all participate in decision-makingin the Money Lender Business rather than leave it to Ngai), and a shareholders’undertaking (to the effect that Ngai, at least, would personally guarantee the shareholders’ loans).  The other shareholders signed the directors’ under­takings but refused to sign the shareholders’ undertakings.[7]

28.  On 24 July 2016, Xie queried whether the company’s contract documents were ready, in particular the first charge contract and the investor loan contract which had been discussed in April.  A meeting was called for 6 August 2016.

29.  Prior to the 6 August meeting:

(1)   On 3 August, Xie stated that he felt the draft loan documents andasset protection charges were too complicated, and he proposed a simple shareholders’ loan agreement between Polly Wealth and its shareholders, with all shareholders acting as joint guarantors.  Ngai indicated that he was not convinced about the security of the proposal.  They agreed to discuss these matters at the meeting.[8]

(2)   On 5 August, Xie circulated a news article about scams involving loan intermediaries.

30.  No one other than Xie attended the meeting on 6 August 2016. No one responded to Xie’s messages asking where they were.

31.  Xie proposed that they reconvene the meeting on 12 August at 10 am.  Privately, Xie messaged Law that his lawyer had advised him to report the matter to the police.

32.  The other shareholders messaged Xie on 9 August.  Law statedhe would get back to Hong Kong on 11 August at night and could meet on 12 AUgust.  Tong said he could make it.  Ngai messaged to apologise and state his father-in-law had passed away, he and his wife were dealing with funeral arrangements, and they would only get back to Hong Kong on 13 August, suggesting holding director and shareholder meetings on 13 August at 5.30 pm.  The others agreed.  It was apparently later agreed to have the meetings on 14 August 2016.

33.  Between 8 and 13 August 2016 (but unknown to Xie until much later), Ngai made 16 cash withdrawals of HK$50,000 each from Future Profit’s bank account. 6 of these withdrawals were apparently notified by telephone to Law by the bank, and confirmed by him, as part of the processing of the withdrawals.

34.  On 14 August 2016, none of Law, Ngai or Tong attended the board meeting.  Instead two men unknown to Xie (Mr Lam Tze Chun and Mr Chan Ka Yu) attended the meeting with documents indicating:

(1)   Tong resigned as director of Polly Wealth;

(2)   A board meeting of Polly Wealth (of which Xie claims he had no notice) had:

(a)appointed three Seychelles companies as the directors of Polly Wealth;

(b)approved the transfer of the shares of Law, Ngai and Tong to three other Seychelles companies;

(c)accepted the resignation of Law and Ngai.

(3)   Law and Ngai had appointed Mr Lam and Mr Chan to attend the meeting on behalf of the three new corporate directors.

35.  After the 14 August 2016 events, Xie sent Law several messages and received no answer; the WeChat group went silent.

36.  On 15 August 2016 (unknown to Xie until much later):

(1)   Future Profit executed a transfer of the Tin Shui Wai mortgages to On Dragon, an unknown Seychelles company, for no consideration.

(2)   Future Profit executed an all-monies floating charge over its entire assets to Superhero, another unknown Seychelles company, for no consideration.

(3)   It has not been demonstrated that Law was directly involved in either of these transfers.  However, On Dragon and Superhero had the same registered office as Future Profit and Superlative.

37.  On 24 August 2016 (but unknown to Xie until much later), Ngaiand Law withdrew the balance of HK$844,635.96 from Future Profit’s bankaccount.  Both Ngai and Law signed the withdrawal slip.  The account was closed on 26 August 2016.

38.  Investigations followed:

(1)   Xie reported the matter to the police on 2 September 2016.

(2)   In around January 2017, Xie instructed Gall solicitors to advise him from the civil law perspective.

(3)   On 7 February 2017, 2 March 2017, 13 April 2017, 18 May 2017, Xie obtained Norwich Pharmacal relief against 6 banks, with the benefit of gagging orders.

(4)   On 20 June 2017, Xie made the ex parte application and obtained the Injunction Order.

39.  Law claims that he transferred his 35% shareholding to Active Converge Limited on 14 August 2016 and resigned as a director of Polly Wealth.  He claims that he sold his shares in the Money Lender Business because Law found it insufferable to co-operate with Xie who repeatedly reneged on his commitments.  Law exhibits an unsent contemporaneous message to Xie dated 14 August 2016, allegedly detailing Law’s grievances.  There is a dispute as to whether this message is genuine or self-serving.  Theonly evidence of the alleged sale of Law’s interest is the alleged resolution of Polly Wealth dated 14 August 2016 to approve the transfer of Law’s shares (as well as the shares of Ngai and Tong, and the appointment of Seychelles companies as directors, and resignation of Ngai, Law and Tong as directors).  No sale agreement nor evidence of payment of consideration for Law’s shares has been produced.  The assertion of a sale of Law’s shares does not sit comfortably with the banking evidence obtained through the Norwich Pharmacal orders showing Law’s involvement in withdrawals from Future Profit’s account after 14 August.  Law’s evidence is silent in respect of the withdrawals from Future Profit’s bank account after 14 August 2016.  Mr Wong SC conceded there was nothing he could say about those withdrawals on the basis of the evidence.

(b)Causes of action

40.  Xie makes his claims against Law on the basis of (1) fraudulentmisrepresentations and (2) conspiracy to defraud (Statement of Claim (“SOC”)paras 90 – 97). Xie claims that he invested HK$41.5 million in the Money Lender Business as a result of such misrepresentations and/or conspiracy, and has suffered a loss of HK$40,530,000 after deducting interest payments received.

41.  Xie relies on 5 alleged representations:  

(1)   At a meeting between late 2015 and 8 February 2016, between Xie, Ngai, Law and Tong,

(a)Ngai represented he had experience in the real estate industry and moneylender business (inter alia);

(b)Ngai and Law orally represented that they were confident that the annual profits of the Money Lender Business would reach at least HK$10 million in 3 years, and the holding company would be on track to be listed on GEM in 3 years; accordingly, they represented that they honestly believed those goals to be viable and genuinely intended to achieve those goal;

(c)by remaining silent, Tong indicated he knew nothing which would cast doubt on the foregoing representations.  

(“the 1^st Representation”)

(2)   On 12 February 2016, at a meeting at Xie’s office between Xie, Law, Ngai and Tong:

(a)Ngai produced a post-IPO structure chart in respect of the corporate structure after the proposed GEM listing;

(b)accordingly, he represented that he had an honest belief that the structure was viable and that the Individuals intended this structure to be set up;

(c)by remaining silent, Law and Tong indicated they knew of nothing which would cast doubt on the foregoing representations.

(“the 2^nd Representation”)

(3)   During a board meeting on 5 March 2016:

(a)Ngai represented that he had found a potential business opportunity in the form of a HK$25 million loan secured by mortgage over 3 Sai Kung properties;  

(b)he indicated that he honestly believed the proposed transaction to be a genuine arm’s length transaction and that he himself was not interested in it;

(c)by remaining silent, Law and Tong indicated they knew of nothing which would cast doubt on the foregoing representations.

(“the 3^rd Representation”)

(4)   On 7 April 2016, Ngai sent a message to Xie, Law and Tong in the WeChat group stating that the borrowers in the Sai Kung loan transaction were unwilling to sign the loan agreement with a later completion date given their having already entered into financial commitments:

(a)he thereby indicated the loan was a genuine arm’s length loan and not one where he was personally interested;

(b)by remaining silent, Law and Tong indicated they knew of nothing which would cast doubt on the foregoing representations.

(“the 4^th Representation”)

(5)   On 8 April 2016, Ngai sent a message in the WeChat group:

(a)stating that about 20 loans had been made to customers totalling about HK$33 million with interest rate of 8% and the Group could earn more than HK$2.6 million per year, and that the interest rate for the Sai Kung Mortgage Loan was 8% and the Group could earn HK$2 million per year;

(b)stating that the Group should be on track to meet the GEM listing requirements in 3 years;

(c)thereby Ngai represented that he honestly believed that the 20 loans and the Sai Kung Mortgage Loan were genuine arm’s length transactions and the Individuals were not interested in the transactions, and that listing of the Group on GEM in 3 years could happen;

(d)by remaining silent, Law and Tong indicated they knew of nothing which would cast doubt on the foregoing representations.

(“the 5^th Representation”)

42.  The conspiracy claim is pleaded as follows (so far as relevant to Law):

(1)   That D1 to D17 wrongfully and with the intent to injure Xie by unlawful means conspired and combined together to defraud Xie and to conceal the proceeds of such fraud from Xie.

(2)   D1 to D3 or one or more of them carried out the following unlawful acts and means by which Xie was injured:

(a)Fraudulently making the false 1^st to 5^th Representations to induce Xie to enter into the Shareholders’ Agreement, take up the allotment and pay up the relevant share capital,advance the First, Second and Third Tranches Shareholder Loans totalling HK$33.5 million to Polly Wealth; and enter into the Personal Loan Agreement with Law and lend him HK$8 million; whereby Xie invested a total of HK$41.5 million into the Money Lender Business directly or indirectly.

(b)Causing various entities including Future Profit, D4 to D14, Profit Trillion and I-Luck to enter into transactions whereby Xie’s investment was siphoned off to their own benefit;

(c)Causing various entities including Future Profit, Apex Goodwill and Mr Pang to enter into transactions whereby Xie’s investment was siphoned off to their own benefit;

(d)Causing Future Profit, On Dragon and Superhero to enter into transactions whereby shareholding in and his loans to Polly Wealth were deprived of value; and

(e)Withdrawing monies from Future Profit whereby Xie’s shareholding in and his loans to Polly Wealth were deprived of value.

43.  For a misrepresentation to be actionable, it must be shown that (a)the representation must be made with the knowledge that it is false, ie it must be willfully false or at least made in the absence of any genuine belief that it is true, or made recklessly without caring whether the representation is true or false; and (b) the representation must be made with the intention that it should be acted upon by the claimant, or by a class of persons which will include the claimant, in the manner which caused damage to him: see Cartwright, Misrepresentation, Mistake and Non-disclosure (4^th ed) §§5-13 and 5-14.

44.  Only the 1^st of the 5 alleged Representations is alleged to have been made by Law, ie Ngai and Law orally represented that they were confident that the annual profits of the Money Lender Business would reach at least HK$10 million in 3 years, and the holding company would be on track to be listed on GEM in 3 years; accordingly they represented that they honestly believed those goals to be viable and genuinely intended to achieve those goals.

45.  My initial concern was that much of the alleged 1^st Representation was a statement of hope.  Mr Man SC submitted that the objectionable part of the 1^st Representation was the representation that the Money Lender Business would be genuine, rather than a means to defraud Xie.

46.  So far as I can see at this stage, having regard to the undisputedevidence, the contemporaneous documents, and using the fund flow diagram dated 11 April 2018 attached to Xie’s opening submissions (“the Fund Flow Diagram”):

(1)   There is no suggestion that Law did not invest his own money in the Money Lender Business to the extent of the share capital paid up and the 1^st and 2^nd Tranche Shareholders’ Loans;

(2)   The 20 Tin Shui Wai Mortgage Loans to D4 – D14 were made and interest paid thereon, which on its face would indicate genuine moneylending business.  However, the Fund Flow Diagram indicates that the Tin Shui Wai loan transactions were not genuine:

(a)Of the approximately HK$33 million advanced by Future Profit to the solicitors on 31 March 2016:

(i)  on 5 April 2016, HK$17 million went to the vendors (as one would expect and appears perfectly proper), and

(ii)  On 1 April 2016, about HK$16.5 million went to solicitors for Profit Trillion, the “confirmor” of the transaction, but:

(1)   that sum (HK$16.5 million odd) was paid in fullon 6 April 2016 to I-Luck.  The sole director of I-Luck was Ngai. The company secretary of I-Luck was Apex Vision, of which Law was a director from February 2013 to March 2014, anda shareholder until some time between February2014 and February 2015.  Apex Vision was also the company secretary of Future Profit prior to January 2017 and of D5 – D14.

(2)   On 8 April 2016, such funds were apparently used to make Ngai and Law’s 3^rd Tranche Shareholders’ Loansof HK$1 million and HK$13 million respectively. 

(3)   It also appears that the Sai Kung Mortgage Loan transaction was not genuine.  Of the approximately HK$25 million advanced in respect of the Sai Kung Mortgage Loan on 8 April 2016 to Hoosenally & Neo (solicitors):

(a)HK$16.75 million was transferred to Target Way (a borrower) on 8 April 2016;

(b)HK$2 million was paid to Apex Goodwill Finance Limited (of which Ngai was sole director) on 11 April 2016;

(c)HK$6.25 million was paid to Pang Hoi Pan (“Pang”) on 12 April 2016.  

(i)  HK$5,955,000 was transferred from Pang’s account to Ngai on 14 April 2016.

(ii)  Pang is the sole director of D8, one of the purported Tin Shui Wai borrowers;

(iii)  A purported interest payment of HK$166,666.67 in respect of the Saikung Mortgage Loan was paid out of Pang’s account to Future Profit, although Pang was not a borrower.

(4)   Clearly Ngai is fully implicated in the non-genuine parts of these transactions.

(5)   Law, less so, but he is still involved in a way which, in my view, requires explanation not yet forthcoming if it is innocent.  In particular:

(a)One of “his” shareholder loans to the Group actually came from I-Luck out of the circulated Tin Shui Wai loans.  This indicates his involvement in the circular transactions masquerading as genuine moneylending.  Law’s explanation that the funds were loaned to him by Ngai is (at the least) inconclusive where there is no evidence of Law making repayment to Ngai (other than Law’s bare assertion).

(b)Given that these circular transactions occurred in April 2016 and were the first transactions of the Money Lender Business, it seems fair to infer that there was no intention from the outset (in about February 2016) to operate a genuine moneylending business.  Contrary to Mr Wong’s submissions, I do not see how such transactions are consistent with a business which was intended to be genuine at the outset but was subject to a breakdown in relations—that does not explain the circular movement of funds.

(c)Law assisted in the withdrawal of monies from, and closure of, Future Profit’s bank account from 8 August 2016.  This was after he failed to attend the board meeting on 6 August, and Law, Ngai and Tong had apparently decided to cut ties with Xie, but pretended to him that all was well and they would meet on 14 August, whilst monies were siphoned off.  The emptying of Future Profit’s account, assisted by Law (at least), continued even after Law claims he had sold his interest in the company.  Contrary to Mr Wong’s submissions, this is very different from Xie’s having co-signed a cheque in favour of himself on 1 May 2016, which was apparently in respect of interest on a shareholder’s loan and therefore legitimate.

(d)The written resolution of 14 August 2016 indicates that Ngai and Law were acting together in (at least) their sudden withdrawal from the Group.

(e)Law had been a registered shareholder and director of Apex Vision until 2014/2015 (before the material time in 2016).  Apex Vision was (at the material time) the company secretary of I-Luck, and of Future Profit, and of D5 – D15 (the corporate borrowers under the Tin Shui Wai Mortgage Loans).

(f)Law’s explanation for exiting the Group because of Xie’s conduct is difficult to accept on the current evidence: 

(i)  It seems arguable that Law would be cross about having to shoulder a HK$8 million portion of the 3^rd Tranche Shareholders’ Loan which Xie had originally agreed to fund.  However, it is equally arguable that just as Xie had stated he could not find the funding when it was required, Law could have said the same.

(ii)  However, no indignation by Law would be expected where the funds to pay that HK$8 million amount appear to have come from I-Luck out of the proceeds of the Tin Shui Wai loans made by the Group, and not from Law’s own funds.

(iii)  Further, Law’s allegation of entering into the HK$8 million personal loan with Xie under duress is entirely at odds with the WeChat messages leading to the Personal Loan Agreement—Law’s attitude during these messages was that Xie was saving him, and that Law considered the terms carefully to ensure he could make repayment to Xie when he got repayment from the Group.

(iv)  Nor does it ring true that Law was so upset about Xie asking for directors’ personal guarantees that Law decided to exit the Group.  In fact, it can be seen that Law and Ngai were telling Xie that they were happy to discuss the personal guarantees and internal contractual documentation at the board meeting on 6 August (which they did not attend) and then at the 14 August 2016 board meeting.  They were indicating that all was well, whilst behind the scenes they were preparing transfers of assets, transfers of shareholdings, withdrawal of cash, replacement of directors and written resolutions, in time for the 14 August meeting.

47.  As to the 2^nd to 5^th Representations, despite initial reservations, I consider there is a good arguable case against Law.  The reservations were, I believe, caused by the manner in which the representations have been pleaded, and the drafting might benefit from clarification:

(1)   As pleaded, reading each in isolation, the 2^nd to 5^th Representations appear to allege Law’s participation to be by mere silence.

(2)   To make good a claim for fraudulent misrepresentation, there must be a representation of fact made by words or by conduct andmere silence is not enough: Bullen & Leake & Jacob’s Precedentsof Pleadings (18^th ed) at §58-01; appliedin Patriarch Partners Media Holdings LLC v Wong Siu Wa, Sammy (unreported) HCA 865/2013, 12 November 2014 at §17 per DHCJ Mayo; Bradford Third Equitable Benefit Building Society v Borders [1941] 2 All ER 205 at 211; Bank of China (HK) Ltd v PersonalRepresentative of Fu Kit Keung [2009] 5 HKLRD 693 at §43 per Chu J (as she then was); Marnham v Weaver (1899) 80 LT 412 at 412 – 413 per Romer LJ.

(3)   If the 1^st Representation is established, then it implicitly follows that Law’s silence thereafter is with the knowledge that there was no genuine moneylending business, and that Law was party to the deceit.  It follows that each further step towards fund-‌raising from Xie for the Money Lender Business on the basis that it was genuine would have been a perpetuation of the deceit.  

(4)   The drafting of the SOC indicates that reliance is only placed on the representations as defined.  Yet, there are also positive steps (not mere silence) pleaded against Law eg paras 27 – 30 and 32 – 34, 45, 49 – 52 (by way of example) of the SOC.  Mr Man SC also argued the case against Law by reference to positive steps.  It seems to me that the factual basis or the misrepresentation/deceit claims against Law is pleaded and supported by evidence, albeit the drafting of the defined terms of 2^nd to 5^th Representation, and reliance thereon, in the SOC is not ideal.

48.  In light of the claims made based on the 1^st to 5^th Representations,there appears to also be a good arguable case in conspiracy.  Mr Wong did not argue to the contrary (but denied a good arguable case in misrepresentation). 

49.  Xie seeks rescission of the Shareholders’ Agreement and the Personal Loan Agreement, damages for fraudulent/negligent misrepresentation and damages for conspiracy (inter alia).  Law’s counsel have not argued that such relief would be inappropriate.

50.  On the basis of the case founded on the 1^st Representation, it seems to me there is a good arguable case that Xie would not have contributed or advanced any money but for the 1^st Representation to the effect that there would be a genuine moneylending business.

D.  MATERIAL NON-DISCLOSURE (“MND”)

51.  By the time of the hearing before me, Law’s list of complaints of material non-disclosure at the ex parte hearing reached 9 items set out in an appendix to Law’s opening submissions.  They are largely factual matters which Law complains were not brought to the ex parte judge’s attention adequately or at all. Law also complains that there was MND of law in that the ex parte judge was not informed that representations by silence such as the 2^nd to 5^th Representations were not actionable.

52.  I have in mind the guidance of Fuad JA (as he then was) in Citibank NA v Express Ship Management Services Ltd[1987] HKLR 1184 at 1190 to the effect that material facts are the facts relevant to the weighing operation which the court has to make in deciding whether to grant the order; and the test is not whether, if the facts had been disclosed, the judge would still have made the order, but whether the facts not disclosed, being relevant, should have been in the scales.

53.  The matters which are necessary to be disclosed are those which would go into the weighing operation conducted by the ex parte judge in assessing whether there is a good arguable case, whether there is a risk of dissipation of assets, and what is the balance of convenience.

54.  In this case, for practical purposes, whether or not there was a good arguable case at the ex parte stage required a consideration of whether there was a good arguable case of a fraud on Xie by Law (inter alia) by virtue of the misrepresentations alleged.  As discussed above, the real claim against Law is that he was party to a false representation at the outset that the Money Lender Business would be genuine. Material facts on this issueare those tending to show whether the representation was made, and whetherit was false ie whether there was no intention that the Money Lender Businesswould be genuine.  To be contrasted with such facts, are details of the façade of a genuine business.  To succeed in a fraud, it is obviously necessary to hide the fraud.  But details of the appearance of the business do not assist with determining whether there was a genuine business or a fraud.

55.  As to the 2^nd – 5^th Representations, it is important to bear in mind that at the time of the ex parte application, there was no statement of claim.  The ex parte judge was aware of the claims as indicated in Xie 1 and the ex parte skeleton.  There, the complaints against Law are seen chronologically and cumulatively, and despite the formulation of the defined terms for the 1^st to 5^th Representations, it seems to me that the 2^nd to 5^th Representations must be considered in the context of the 1^st Representation having been established ie that Law falsely represented at the outset an intention that the Money Lender Business would be genuine.  Accordingly, the 2^nd to 5^th Representations must be considered in the context of Law knowing that the Money Lender Business had not been genuine from the outset.

56.  If I considered that the pleas were genuinely of representation by silence, then I would agree that the legal principles as to misrepresentation by silence ought to have been canvassed at the ex parte hearing.  However, as stated above, that is not my view of the actual case made against Law. 

57.  The ex parte application preceded the SOC.  The skeleton claims that Xie relied on: the 1^st and 2^ndRepresentations before entering the Shareholders’ Agreement (also signed by Law); the 3^rd Representation which was made before Xie paid $25 million; the 4^th Representation in respect of the Sai Kung transaction; Law’s message of 8 April 2016 and the 5^th Representation before Xie paid HK$5 million; then Law’s message of 25 April 2016 leading to Xie’s loan of HK$8 million.   The ex parte skeleton’s description of the claims against Law in my view make plain that Xie relies on participation by Law in the knowledge that the Money Lender Business was not genuine, not mere silence.

58.  It is certainly necessary to read the claims based on the 2^nd to 5^th Representations in light of the 1^st Representation.  

59.  I will deal with each of the 9 factual complaints in turn. Law complains that the following matters were not disclosed at the ex parte hearing:

(1)  The time of setting up the WeChat group—in early April 2015 rather than late 2015.  I am completely at a loss to understand how this could be material.

(2)  Whether the first business discussion between the group (unrelated to the Money Lender Business) anticipated a cooperation between all of them, or only an opportunity for the Individuals.  Again, I do not understand how this could be material.

(3)  Whether the Sai Kung Mortgage Loan should have included a sale and purchase of the Sai Kung Properties, and whether Xie should have known it did not because the transaction (without such sale) had been explained to him.  In my view, whether or not the Sai Kung Mortagage Loan was a loan in order to purchase the Sai Kung Properties, or a loan for other purposes secured against the Sai Kung Properties, is not material to the question of whether or not the loans were genuine and arm’s length and were indeed secured (in the absence of registration of the mortgages).

(4)  There was a board meeting on 19 March 2016 where Ngai (i) stated that funding was needed for the Tin Shui Wai Mortgage Loans and the Sai Kung Mortgage Loan; and (ii) reported that Central Impulse and Win Top had been bought for asset management and tax planning purposes.  As to (i), this fact wasalready plain.  As to (ii), the internal discussion of internal loan documents and asset protection charges is also not material.  There is no question that the shareholder loans were made.  There is no question that such loans were not secured.  The factthat formal documentation and security was under discussion is neither here nor there.  These matters do not appear to assist the Court to decide whether the shareholders other than Xie were seeking to defraud Xie or not.

(5)  A WeChat conversation between Xie and Law on 26 March 2016,in which Law (apparently) set out his thoughts on the proposed transactions (at a time before Xie invested HK$25 million). This did strike me as potentially material at first blush.  It wouldappear to be a matter which Xie could rely on to argue that Law further participated in the deceit.  However, Xie did not seek to rely on it at the ex parte stage, and indeed had ample other evidence to rely on, so this would in my view not have materially affected the weighing operation.  More importantly, I do not consider this message would be material to Law’s defence.  It does not assist the Court to identify whether the money lender business was genuine and the state of Law’s knowledge about the genuineness of the business.  The message is equally consistent with Law not knowing about the fraud, alternatively Law knowing about the fraud and assisting in the façade to hide the fraud.  I do not consider there to have been MND in this regard.

(6)  Engagement of lawyers by the Money Lender Business in respect of the transaction documents for the Tin Shui Wai Mortgage Loans, and to advise the Shareholders in respect of Internal Loan Documents and Asset Protection Charges.  I do not see how this fact would assist the ex parte judge to assess whether there had been a fraud, as opposed to the (in my view) non-material issue of the façade created of a genuine business.  The normal use of lawyers as a conduit for loan monies sheds no light on the ultimate money-trail.

(7)  Knowledge of the existence of Central Impulse, Win Top, Markway and Win Glory before 11 June 2016.  Xie made the point that he had not approved the restructuring of the Group to incorporate these companies rather than that he had no knowledge of these companies.  I consider that the ex parte judge would neither have been assisted in his weighing operation by (1) information about the discussions on asset protection for the Shareholders which, if there was a fraud, was simply an element of the façade; nor (2) information about companies which were proposed to be used for a business opportunity which did not get off the ground and in respect of which there is no information shedding light on whether the Money Lender Business was genuine.

(8)  The Shareholders’ efforts to execute the Asset Protection Charges in July 2016.  In my view, this is not relevant to whether the business was genuine and/or whether the Individuals intended to and/or did siphon off Xie’s money.  This is simply a detail of the façade to cover the fraud (if there was one), or a part of the business administration (if there was no fraud).  But it does not help in the assessment of whether there was a fraud.

(9)  Xie’s attempt to impose personal guarantees.  Given the actual communications between Xie and the Individuals, and then the lack of communication by the Individuals after 14 August 2016, I do not see how it can be said that Xie knew, or could have found out, that Law would argue that he had broken ties with him because of the request for personal guarantees (inter alia).  Accordingly, I do not consider that there was any MND in this respect.  Further, the demands for personal guarantees was simply part of the (in my view) non-material discussions about internal formalisation of, and provision of security for, the shareholder loan position.

60.  It seems to me that inadequate attention has been paid by Law’s legal team to the guidance given time and again by the Courts, eg per Macdougall J (as he then was) in Citibank, that in laying down principles concerning disclosure of all material facts, the courts have not 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 material and so discharge the injunction; common sense must prevail; and the heavy burden cast on a plaintiff must not be allowed to become so onerous as to be intolerable.

E.  RISK OF DISSIPATION OF ASSETS

61.  There is in my view unquestionably evidence of a risk of dissipation of assets by Law in light of his unexplained involvement with the withdrawal of funds from Future Profit’s bank account in August 2016 to Xie’s detriment.  I note that in June 2017, Law wired the interest payment on the Personal Loan Agreement to Xie, after the relevant post-dated cheque had been dishonoured.  However, this is insufficient to outweigh the other evidence of a risk of dissipation of assets.

F.  BALANCE OF CONVENIENCE

62.  There is nothing significant raised in respect of the balance of convenience eg in terms of any prejudice to Law if the Injunction is continued.  Xie has given a cross-undertaking as to damages. 

G.  CONCLUSION

63.  The Injunction will be continued against Law until further order.

64.  I am not currently aware of any reason why I should not continue the Injunction Order against the other defendants for the time being.  However, there should be a return date for the Summons as against those other defendants within 28 days to update the Court on service on the other defendants and whether it remains appropriate to continue the Injunction Order against them.

65.  I make a costs order nisi:

(1)   the costs of and incidental to the inter partes hearing be paid byD1 to P, to be taxed if not agreed with certificate for two counsel.  

(2)   The remaining costs of the Summons as against D1 be costs in the cause.

(3)   Any request for variation of the order nisi should be made in writing with supporting submissions within 3 days, with any responsive submissions made in writing within 3 days thereafter.