DISCREET LTD. v. GLOBAL ISLAND INVESTMENTS LTD. AND ANOTHER

HCCT 48/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. HCCT 48 OF 2002

____________

____________

_______________

J U D G M E N T

_______________

1. This is an application to continue a Mareva injunction. It was the position of the plaintiff (Discreet) that in fact there was no proper interim order to be continued. I rejected that proposition at the hearing, and must set out my reasons for that decision. To do so it is necessary to review in some detail the way in which the matter has reached me.

2. Discreet is a private company effectively owned and controlled by its director Mr. Daniel Kwan (Mr. Kwan). In January 2001 Discreet and the 1st defendant (Global) entered into an agreement for the sale of certain land and the construction of a house thereon. Construction began sometime thereafter. From June 2001 to January 2002 Global had issued defect lists to Discreet. Discreet responded to these variously. For some liability was denied, for others liability was accepted, for some there were offers to make good or payments in lieu. But not all matters were resolved by agreement and pursuant to an arbitration clause in the contract the 2nd defendant (Mr. Mann) had been appointed arbitrator on 21 January 2002 to resolve the outstanding differences.

3. On 24 January the arbitrator issued an "Order for Directions" calling for a preliminary meeting on 26 January. The arbitration then formally commenced. Discreet claimed a balance due by Global, who in turn counter claimed in respect of alleged defects. As required by the contract, and notwithstanding the ongoing arbitration, Global paid the sum of $4,155,000 to Discreet on 9 February,

4. Mr. Kwan, the director of Discreet, who solely owns the company, was dissatisfied at the manner in which the arbitration was being conducted. On 30 May Discreet issued an Originating Summons applying to remove Mr. Mann as arbitrator. At an inter partes hearing Burrell J gave directions for the filing of affidavits. On 15 May Discreet applied to Mr. Mann to stop the arbitration proceedings. By that time Mr. Mann had inspected the property and the parties had served their respective case outlines, statements of claim and counterclaim and defences. Replies to the defences had been filed. Closing statements were due to be filed by 25 May. At a procedural hearing at a solicitors office on 7 June both parties attended Mr. Mann with their solicitors. Oral and written submissions were made to Mr. Mann who ruled that the arbitration would continue.

5. On 27 June Discreet sought an interim injunction to restrain Mr. Mann from proceeding further with the arbitration. That matter came before Ma J. as duty judge on an inter partes basis on 28 June. The learned judge adjourned the matter to Burrell J. as judge in charge of the Constriction and Arbitration List, and directed that any application to file affidavits in support must be made to that judge. No further steps have been taken by Discreet in pursuance of the interim injunction.

6. On 3 July Global, by its counsel, appeared ex parte before Burrell J seeking a Mareva injunction against Discreet. As the judge was heavily engaged in another matter and did not have time to read the papers he directed that the injunction application should go before the duty judge. That was a perfectly proper order. Global then went before Pang J who made the order sought, fixing 12 July as the return date.

7. There then began a set of circumstances which have given rise to a great deal of difficulty and confusion. Global's then solicitors made significant errors in drafting the order, so that in numerous places the word "plaintiff" was incorrectly stated as "defendant". Although the errors were significant in their effect, they were simple drafting errors. The order, as sealed, did not injunct Discreet as intended, but instead Global who had sought the order. It is, to an extent, understandable as to how the error was made. In most cases it is a plaintiff who seeks to restrain a defendant. In the particular circumstances of this case the party to be restrained is, unusually, the party who began the proceedings in which the restraint order was sought, and is in the proceedings described as the plaintiff. The order as sealed sought to restrain the "defendant" instead of the "plaintiff". The order, in its incorrect form, was sealed and served.

8. Discreet then went ex parte before Pang J on 3 July. There is no record of what was said to the judge, or the basis on which the order was sought or made, but an order was made by the judge that the order that had been sealed should be discharged as being "frivolous, scandalous, incompetent and vexatious" Costs to the plaintiff were ordered on an indemnity basis and the return date of 12 July vacated. That order was sealed and served on Discreet

9. The next day, on Saturday 6 July, Global went before the duty judge, Suffiad J. It is clear from the transcript of that hearing, at which both parties were represented, that Global, now not having an order in its favour, sought to have an order made on its merits, against the plaintiff. After hearing both sides Suffiad J granted the order sought, being satisfied that he had jurisdiction to "re-grant" the order discharged by Pang J on the ground that the earlier order was defective and had been discharged. The return day of 12 July was restored. The new order was presented for sealing. Errors continued and the new order was entitled an "Amended" order. It plainly was not an amended order. It was a new order, or a re-granted order, as the body of the order stated.

10. That order was sealed. The inclusion of the word "amended" was not the only error. There were further minor drafting errors as to detail. A property description contained the number "5" instead of "534", and an exhibit was wrongly described. A bank was called "International and Commercial Bank of China" instead of "Industrial and Commercial Bank of China".

11. On 12 July the matter came again before Suffiad J, that day being the return day. Mr. Beaumont for Discreet argued that the order should be discharged, first, because it ought to have gone before the Construction and Arbitration List judge, second, because it was not an amended order and that on 6 July there was nothing to amend, and third, that it was wrong to say that it was a re-grant. All of these arguments were rejected by Suffiad J for reasons given in an oral ruling delivered on that day. Having then heard the parties on the merits, he made an order that corrected the drafting errors I have detailed, and the matter was adjourned to 19 July for further affidavits and argument as to continuation.

12. On 16 July Mr. Mann delivered an "Interim Award No.1", which, in accordance with an agreement of the parties, reserved five issues for later decision. The result of the award was that Discreet must pay Global a sum of $128,544. The five remaining issues relate to claims made by Global and disputed by Discreet, so any further awards can, subject to the incidence of costs, serve only to increase the amount due by Discreet, and not diminish it. The question of costs remains outstanding for award. Mr. Beaumont made it clear that Discreet intends to challenge the validity of the award.

13. And so on 19 July I heard argument on the issue as to whether the Mareva injunction should be continued. It was Mr. Beaumont's wish to argue, having regard to the scenario I have outlined, that there was nothing before the court that could be properly continued as, he argued, the order of 6 July was not a proper order. I rejected that argument. I took the view that the order, having been made on 6 July by Suffiad J, and listed for a return day, must be dealt with as a proper order. If Discreet wished to argue that there was no order that was a matter that ought to go before the Court of Appeal and that I had no jurisdiction to pronounce another judge's order as having been made without jurisdiction.

14. I turn therefore to consider the merits of the matter. In determining whether the order should be continued I must have regard to all of the evidence that is now before me. It is quite irrelevant that I may not have made the order on the basis of the information before the court on 3 or 6 July.

15. A Mareva injunction is available to restrain a person from disposing of assets in circumstances where the court is satisfied that, on an objective basis, the result of the disposal involves a real risk that a judgment or award will go unsatisfied. There must be solid evidence that there is a real risk of dissipation and that consequently the judgement or award will go unsatisfied. It is not necessary for the applicant to establish a nefarious purpose on the part of the other party. If the effect of lawful dealings is that a judgment or award will go unsatisfied there is jurisdiction to make the order. That said the jurisdiction is one that is exercised only with the greatest care and caution for, as has often been said, a Mareva order is a draconian order and may easily be used as a tool of oppression. The court must remember that if the applicant's claim succeeds the other party may be faced with insolvency, but that in the meantime he is entitled to carry on business and to meet his ordinary living expenses and even pre-existing legal or moral obligations. With these matters in mind I consider the evidence.

16. The annual accounts to 31 March 2001 of Discreet are exhibited to Mr. Kwan's 5th affidavit. Those for 31 March 2002 are not yet ready. The affidavit did not disclose the whole set of accounts and it was necessary for me to ask for a complete set. Significantly the Income Statement and the notes to the accounts were omitted. When a company's accounts are exhibited to an affidavit there can rarely be any reason for not disclosing the whole set of accounts, and if less are exhibited the reason should be explained. On the basis of the balance sheet the company is insolvent. It shows assets of some $84 million and liabilities of a sum in excess of $104 million. Of the liabilities $54 million is due to "a director", presumably Mr. Kwan. The greatest part of the assets comprise fixed assets of $77 million. These are unidentified properties at cost. The date of acquisition of the properties is not disclosed. It is common knowledge that the property market in Hong Kong has reduced markedly in the last few years. In such circumstances annual accounts based on cost cannot be considered reliable unless full information is supplied.

17. The income statement shows an annual income of $2.2 million. Expenses of $1.5 million are simply described as "staff costs" and "other operating expenses" and are not detailed. One of the main assets of the company was a real estate investment known as "Sienna Garden". That property was sold in January 2002. A valuation report (Ex EFB5-3) made in January 2000 shows that total rental from Sienna Garden was $170,800 a month, or $2,049,600 a year, virtually the whole of Discreet's income. That income is not now available to Discreet. Prior to the sale of Sienna Gardens the company operated at a loss of $3.5 million for the year. That position is exacerbated with the sale, even allowing for reduced liabilities.

18. The property at Sienna Gardens had been on the market for some time prior to January 2002. A contract for sale was entered into on 16 January 2002, only 5 days prior to the formal appointment of the arbitrator, and at a time when the clear inference is that Mr. Kwan knew that he was, at the very least, in dispute with Global, and at worst when he must have known that either arbitration or litigation was imminent. Sienna Garden was sold for $26.5 million. The purchaser was CLJV Limited, a company whose shareholders are nominees. Accordingly, there is no way of knowing whether that company has any association with Mr. Kwan. There is no assertion from Mr. Kwan that the transaction is an arms length transaction. No documentation was provided in respect of the transaction. This aspect is relevant because in January 2000 the property was valued at $46 million, but sold for $26.5 million in January 2002. On the whole of these circumstances there is, in the absence of any explanation of the circumstances other than the fact of the sale, a strong inference that the property has been sold at a substantial undervalue.

19. Pursuant to the order made by Suffiad J Discreet was required to disclose a bank account it held with the Industrial and Commercial Bank of China. That account was disclosed, but an analysis of the account shows no payments at all of a rental nature being made to the account. Neither did the account show the payment of $4,155,000 made by Global on 9 February. Mr Beaumont argued that the order required only the disclosure of that account. That is right. But Discreet faced an application for a Mareva injunction. If it was to argue that it was not dissipating its assets it should place all relevant accounts before the court. If it chooses, as is so often the practice in Hong Kong, to disclose the bare minimum that is required, and conceal other matters which may help or ought to be disclosed, its case will be determined on that basis. I was not prepared to have the matter adjourned for further information to be put before the court. I allowed Mr Beaumont to put into the bundle details from another account, this time with Bank of East Asia. That account showed the deposit and disposal of the Global payment, but although there were other deposits no suggestion was made that they were rental payments. The account into which rental payments had been made remains apparently undisclosed.

20. In respect of both accounts disclosed it is plain that as soon as funds are deposited in the accounts they are immediately withdrawn so that nominal balances only are maintained. Thus, a technically insolvent company continually ensures that it has virtually no current assets.

21. The order required Mr. Kwan to inform the court of the proceeds of sale of a property known as "lot 2 in DD No 210 Sai Kung NT". That brought the response that the company did not own that property and a search of that property was exhibited. That was an entirely disingenuous response and one plainly designed to obfuscate. I have no doubt at all that both Mr. Kwan and his advisors knew that what was meant was Lot 534 in DD 210. That is of course the property sold to Global. That the information was not provided until after the order was corrected on 12 July says nothing for the honesty of Mr. Kwan, and demonstrates a clear lack of understanding on the part of his advisors of the duty of frankness in these matters.

22. In his 5th affidavit Mr. Kwan discloses, although without producing the relevant bank account until during the hearing, the application of the proceeds of Global's payment of $4,155,000. Of that sum $2.2 million was paid to a company wholly owned by Mr. Kwan for the purchase of land by Discreet in February 2000. No documentation was produced to substantiate this assertion nor was there any explanation as to why the payment was to be made over two years after the purchase. Mr. Kwan paid $1.9 million to himself, in reduction of his director's loan. In the accounts of Discreet the auditor records that the ability of the company to continue as a going concern was dependant upon the financial support of the director, presumably Mr. Kwan. At the very time when the company faced the possibility of an adverse arbitration award Mr. Kwan has found it appropriate not only to stop that financial support, but to withdraw, to his own advantage and to the disadvantage of any creditor of the company a sum of $1.9 million. He offered no explanation as to why that payment should be made at that time.

23. The sale of Sienna Gardens reduced the assets of Discreet but it also reduced the liabilities. The company was left with two properties, Lots 414 & 415 in DD 399 Ting Kau (Ting Kau) and a flat at the 3/F, 49C Robinson Rd (Robinson Rd). In his 5th affidavit Mr. Kwan said that Ting Kau was worth more than $35 million and Robinson Road about $4 million. He said that they were subject to a mortgage to First Pacific of $19,550,000. A valuation report addressed to Discreet dated 18 July 2002 put the value of Ting Kau at a maximum of $28 million and Robinson Rd at $4.8 million. An analysis of the First Pacific facility letter dated 11 March shows that the total facility is for $28.2 million and that a third property at Chung Tak Mansions in Magazine Gap Road, owned by Chinapro Limited, (also wholly owned by Mr. Kwan) is part of the security. But although the loans are allocated as between the companies, $19,550,000 to Discreet and $8.7 million to Chinapro, it is clear that the properties offered are security for the whole sum of $28.2 million. There is no evidence at all as to the circumstances of Chinapro so I must approach the matter on the basis that there may be nothing in Chinapro and that both Ting Kau and Robinson Rd are subject to a liability if $28.2 million.

24. The whole of these circumstances present the following picture. Discreet is a technically insolvent company, operating at a very substantial revenue loss each year, but that from time to time has substantial sums of cash passing through its accounts. As soon as funds reach the accounts they are immediately withdrawn so that the accounts are maintained with relatively nominal balances. Some of those withdrawals are for the direct benefit of Mr. Kwan personally or are made to a company solely owned by him. The account into which rental income was paid has apparently not been disclosed. The company has, immediately before the arbitration began, and with the knowledge that arbitration or litigation is imminent, sold a property that is substantial in both capital and income terms, at a potentially significant undervalue to a purchaser whose true identity cannot be determined. Mr. Kwan has, in his conduct of the Mareva litigation been, at best, less than frank.

25. In all of these circumstances I am satisfied that this is a case where solid evidence has been produced to demonstrate that there is a real risk that the award may go unsatisfied. There is no evidence that the injunction, in the terms sought, will have any effect on any moral or legal obligation Discreet may have to any third party nor is it argued that it may prevent Discreet or Mr. Kwan from meeting ordinary living expenses. It requires Discreet to preserve a sum of $1 million.

26. Mr Kerr placed emphasis on what he described as the baseless nature of the application to remove the arbitrator. The relevance of those submissions was that a claimant for a Mareva injunction must establish that he has a good arguable case. I do not need to consider those submissions for I am satisfied that, the arbitrator having made an award, Global is prima facie entitled to enforce the award and is therefore in the same position as a litigant who has a judgment in his favour. It is no answer in such a case to contend that there are grounds on which to appeal the judgment which, at face, provides a good arguable case.

27. I accordingly order that the Mareva injunction granted by Suffiad J on 6 July, and amended on 12 July, shall remain in force until further order of the Court. There will be an order nisi that costs of the application to be costs in the cause. I will hear counsel on costs if required. Leave is reserved to apply.