INSPIRING INVESTMENTS LTD v. CHUN HU HING AND ANOTHER

HCA 2090/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2090 OF 2014

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DECISION

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Introduction

1.  This court is seized with three applications arising from the worldwide Mareva injunction obtained on an ex parte (on notice) basis by Inspiring Investments Limited (“IIL”) against Chun Hu Hing (“HH Chun”) and Chun Hung Wai William (“HW Chun”) (“the Injunction Order”) from DHCJ S.T. Poon on 30 October 2014.  

2.  First, HH Chun applies for a variation of certain terms of the Injunction Order so as to allow him to deal with his assets by his summons dated 5 November 2014 (“the Variation Summons”).

3.  Second, IIL applies for an order that HH Chun do serve an affidavit to make further disclosures in respect of his assets disclosed in his affidavits by its summons dated 28 January 2015 (“the Disclosure Summons”).

4.  Lastly, HH Chun applies for payment out of court under O22 r.1 of the Rules of the High Court by his summons dated 25 March 2015 (“the Payment Out Summons”).

5.  None of these three summonses concerns HW Chun and he has not taken any part in the present dispute.

6.  I shall first outline the background facts of these three applications and then deal with them in turn.

Background facts

IIL’s claim

7.  Mr Ip Tak Kuen (“Ip”) is and was at all material times the sole director of IIL. HH Chun and HW Chun are father and son. HH Chun is a shareholder and director of Goldstone Apparel Concept Limited (“Goldstone Apparel”). HW Chun was at the material times a director and has throughout been a shareholder of Goldstone Apparel.

8.  Starting from 31 March 2010, Ip on behalf of IIL made advancements to Goldstone Apparel with HH Chun and HW Chun being the guarantors of such loans. I intend not to set out the details of their dealings save the key events here.

9.  On 22 July 2011, IIL entered into a loan agreement with Goldstone Apparel (“the Loan Agreement”) whereby IIL agreed to lend HK$6,666,500.00 (including previous advancements) to Goldstone Apparel (“the Loan”). Under the Loan Agreement, again HH Chun and HW Chun agreed to act as the guarantors of the Loan and Goldstone Apparel should repay the Loan to IIL on 21 July 2012. The Loan together with interest was agreed to be convertible into shares in Goldstone Apparel at the conversion rate of HK$666.65 per share.

10.  In late June 2012, IIL, HH Chun and HW Chun reached an agreement (“the Sale of Shares Agreement”), which was made partly orally and partly in writing (evidenced by emails). It was agreed that IIL would exercise its right under the Loan Agreement to convert the Loan together with interest accrued thereon for 12,287 “Series A Preferred Shares” in Goldstone Apparel (“the Preferred Shares”) in settlement of the Loan. The Chuns agreed to arrange the Preferred Shares to be sold to third parties at the like amount of the Loan by 31 December 2012. They promised that in the event that no such sale could be completed, HH Chun would purchase the Preferred Shares from IIL at the said amount.

11.  Under the Sale of Shares Agreement, it was also agreed that each of the Chuns would execute a personal guarantee for the said amount. HH Chun further pledged his interest in a property in Canada jointly owned with his wife to Ip as security (“the Canada Property”).

12.  Pursuant to the Sale of Shares Agreement, IIL entered into a share purchase agreement and a shareholders’ agreement in respect of Golden Apparel. Golden Apparel issued the Preferred Shares to IIL. HH Chun purportedly issued a letter of assignment in respect of his interest in the Canada Property in favour of Ip and also executed a personal guarantee.

13.  In this action, IIL sues on the Sale of Shares Agreement. The alleged breaches include the failure of the Chuns to sell the Preferred Shares by 31 December 2012 and the refusal of HH Chun to purchase them in default. Golden Apparel is in dire financial conditions and has ceased operation. The Preferred Shares are only worth no more than its nominal value of HK$12,287.

14.  Moreover, it was found out that HH Chun disposed of the Canada Property without any prior notice given despite the pledge he gave under the Sale of Shares Agreement.

15.  Hence, IIL claims against the Chuns for damages being the amount of the Loan minus the value of the Preferred Shares. The Writ was issued on 20 October 2014.

16.  What prompted IIL to make the ex-parte application was the recent sale of a property in Hong Kong jointly owned by HH Chun and his wife (“the HK Property”) under suspicious circumstances. Prior to the sale, a colleague of Ip posed as a prospective buyer and inspected the HK Property. Madam Chiu who is the wife of HH Chun received him and told him that she would relocate to Canada with her family soon. IIL contends that the HK Property was the only valuable asset of HH Chun on which IIL might lay its hands on for any award of damages in this action.

Orders thus far made

17.  First, on 30 October 2014, IIL obtained the Injunction Order whereby HH Chun is restrained from disposing of his assets up to the value of HK$6,654,213 and HH Chun is obliged to disclose in writing all his assets of an individual value of HK$50,000 or more, whether in or outside Hong Kong, whether in his own name or not, and whether solely or jointly owned, giving all the relevant information of all such assets. The written disclosure has to be confirmed in an affidavit (“the Disclosure Obligation”). As one of the exceptions to the Injunction Order, HH Chun is allowed to spend HK$10,000 per week towards his ordinary and proper living expenses and a reasonable sum on legal advice and representation.

18.  HH Chun first took out the Variation Summons to apply for variation of the Injunction Order so as to allow him to use the sale proceeds of the HK Property to settle his outstanding personal loan with Hang Seng Bank in the sum of HK$500,000 (“the Hang Seng Loan”) and his outstanding credit card payments in the total sum of HK$184,130 (“the Visa Outstanding Payments”). HH Chun further asks for leave to proceed with the sale of the HK Property and to distribute the net proceeds thereof in equal shares with his wife. He asks his share to be deposited into his Hang Seng account.

19.  On 7 November 2014, the return day of the Variation Summons, L Chan J ordered that the net proceeds (after deduction of all the necessary expenses and a sum of HK$60,00 being the ordinary and proper living expenses of HH Chun) be paid into court with liberty to apply for its release. The judge also ordered that HH Chun do file an affidavit to fulfill his Disclosure Obligation by 14 November 2014.

20.  Pursuant to the said order, on 10 November 2014, HH Chun paid into court a sum of HK$6,469,512.95 being the net proceeds of the sale of the HK Property (“the Net Proceeds”).

21.  L Chan J made two orders subsequently to provide for HH Chun’s living and legal expenses. First, on 26 January 2015, the judge ordered that a sum of HK$70,000 be released to HH Chun from the Net Proceeds and a monthly payment of HK$10,000 be made to him from the Net Proceeds.

22.  The judge further on 16 March 2015 ordered that HK$110,000 be released to HH Chun as interim payment of the legal expenses to be made to his lawyers.

The applications

Disclosure Summons

23.  I should first dispose of the Disclosure Summons. HH Chun purportedly fulfilled his Disclosure Obligation under the Injunction Order by his two affidavits. IIL is still unhappy with the disclosure made. It has three main complaints.

24.  The first two complaints relate to the alleged values of the shares owned by HH Chun in Goldstone Apparel and Cindex Management Services Limited (“Cindex”). It is alleged that HH Chun has overvalued the values of his shares in Goldstone Apparel (valued at HK$3,350,000) and Cindex (valued at HK$333,200) and his valuations stated in his affidavits are without basis. Worse still, his valuations are apparently contradicted by the respective latest Annual Returns of the two companies.     

25.  Against this background, IIL seeks an order that HH Chun do file an affidavit to disclose more information about the values of his shares in Goldstone Apparel and Cindex with supporting documents.

26.  Ms Ho, for IIL, relies on Yau Chiu Wah v Gold Chief Investments Ltd & Anor. [2002] 2 HKLRD 832 to support IIL’s request for further disclosure. There, Ma J (as the Chief Justice then was) had this to say (at §16):

“Mareva injunctions are exceptional orders but once granted, must be made effective and practical. The possibility of contempt proceedings (which are usually long, drawn out applications) cannot by itself provide the only practical means of making effective of a Mareva injunction. The reason why ancillary orders to a Mareva injunction are made is so that as far as possible, precise assets of the defendant are located and identified… The identification of specific assets enables a Mareva injunction to be made more effectively. For example, third parties may hold the assets of a defendant whether knowingly or unwittingly. The reference to the position of third parties is a standard feature of the terms of a Mareva injunction underlines just how common it is that the third parties are involved with the assets of a defendant.”

27.  I have studied the disclosure thus far made by HH Chun. Apart from his interest in the Net Proceeds and his shares in Goldstone Apparel and Cindex, his remaining asset is his MPF Investment Fund valued at HK$525,837. He says that all his shares are not subject to any charge or encumbrance in his last affidavit made after the issue of the Disclosure Summons.

28.  HH Chun’s position is that he is only entitled to half of the Net Proceeds, i.e. HK$3,234,756. To comply with the Injunction Order, in his own case, he cannot dispose of his shares in Goldstone Apparel and Cindex in any event.

29.  It is pertinent to note that the practice of the court is not to make an order for the purpose of investigating whether an injunction has been broken and if so to supply material for contempt proceedings: Gee, Commercial Injunctions, 5^th ed. (2004), §22.005. See also Pacific King Shipping Holdings Pte Ltd (in compulsory liquidation) v Huang Ziqiang [2015] 1 HKLRD 830 per Le Pichon JA at §32.  

30.  I accept that there is no apparent basis for HH Chun’s valuations of the shares in Goldstone Apparel and Cindex and the doubt of IIL about the same is reasonable. However, in the particular circumstances of this case, I am not convinced that further disclosure about the values of the shares, which IIL contends may show they have been overestimated, is necessary to make the Injunction Order effective and practical at this stage. I do not find it appropriate to exercise my discretion to order further disclosure in the interests of justice.

31.  IIL further complains that there is not sufficient disclosure of the whereabouts of the sale proceeds of the Canada Property. It was sold on or about 20 May 2014 at CAD$380,000.

32.  In his affidavit, HH Chun says that he has spent all of the sale proceeds before the Injunction Order was made in late October 2014.

33.  Ms Ho makes an able submission as to why his assertion is not credible and urges this court to order him to make an affidavit to set out the details as to how he has spent his share of the sale proceeds with documentary proof and whether any remaining amount of the said shares has been held by any third party after the Injunction Order was made.

34.  IIL may have skepticism about the alleged exhaustion of the sale proceeds within five months. Be that as it may, there is no evidence that such sale proceeds in the amount in access of HK$50,000 indeed were still available to HH Chun after the Injunction Order was made and HH Chun still disposed of such remaining sale proceeds in breach of the Injunction Order.

35.  Bearing in mind the ancillary nature of a disclosure order in aid of a Mareva injunction, I am not persuaded that it is necessary in the interests of justice to make the disclosure order now sought. I do not think I should exercise my discretion to accede to its application to order further disclosure in regard to the sale proceeds of the Canada Property.

Variation Summons

36.  HH Chun seeks to apply the Net Proceeds to pay off the Hang Seng Loan and the Visa Outstanding Payment. IIL raises two objections.

37.  First, Ms Ho argues that the monthly allowance of HK$40,000 (HK$10,000 per month) should suffice to include making instalment payments of the Hang Seng Loan and the Visa Outstanding Payments.

38.  I cannot accept this submission. The weekly allowance of HK$10,000 for ordinary and proper living expenses and legal fees was ordered at the ex-parte stage without any regard to the said liabilities of HH Chun. It cannot be intended for instalment payments of such liabilities. Indeed, I do not find the said weekly allowance to be sufficient to cover repayment of such liabilities.

39.  It is also unreasonable to require HH Chun to merely pay the minimum payments for his indebtedness of his visa cards thereby incurring substantial interest. As rightly pointed out by Mr Lai, for the Chuns, IIL is not a secured creditor. Nor does it have any proprietary claim in the Net Proceeds. The indebtedness now HH Chun seeks to repay is genuine and such repayment cannot be said to be an improper dissipation of his assets. I see no reason why HH Chun should not be allowed to pay his bona fide creditors out of the Net Proceeds.

40.  Ms Ho next argues that the disclosure of HH Chun about his financial position is inadequate and hence this court should be slow to increase his allowance.

41.  I cannot accept her argument. Apart from the bare allegation that the sale proceeds of the Canada Property are still available to HH Chun, there is no evidence suggesting that HH Chun has concealed his other assets. I have read the bank documents and I am satisfied that there are liabilities to be settled. I believe it is only right that HH Chun should be allowed to make a proper use of his monies to extinguish such liabilities.

42.  I therefore come to the conclusion that HH Chun’s application by the Variation Summons should be allowed and I would further order that he should make an affidavit to satisfy this court that the released fund has actually been applied to discharge such liabilities with adequate documentary proof within three months of this Decision.

Payment Out Summons

43.  I now turn to the last summons. By the Payment Out Summons, HH Chun applies for a release of half of the Net Proceeds in the sum of HK$3,234,756.50 to Madam Chiu from the court. He also asks for an order that he do procure Messrs. Kenneth C.C. Man & Co. to pay a sum of HK$11,311.00 being the apportionment sum from the sale of the HK Property to Madam Chiu and HH Chun in equal shares.

44.  Whilst there is no dispute that the HK Property was registered under the names of HH Chun and Madam Chiu as joint tenants, Ms Ho submits that the sale per se did not bring about a severance of the joint tenancy in respect of its sale proceeds. In this regard, she pertinently refers me to the dictum of Clark J in Perry v Perry Estate [2001] A.J. No 538 at §8 citing a passage of Principles of Property Law (1991):

“A sale or lease by all joint owners does not result in a severance, without more, because this arrangement is consistent with the continuation of joint ownership in the proceeds of sale or in the newly acquired property. However, the result should be different if there is an agreement to sell and thereafter divide the proceeds of sale.”

45.  Ms Ho goes on to argue that there is no evidence that there was an agreement to sell and thereafter to divide the proceeds of sale between HH Chun and Madam Chiu before the Injunction Order was made. Hence, the Net Proceeds remain to be their joint properties.

46.  I am unable to accept this submission. The uncontradicted evidence of Madam Chiu and HH Chun is that Madam Chiu, based on her financial contribution to the HK Property, expected, and still expects, to have at least 50% of the Net Proceeds.

47.  Such an expectation was made known to DHCJ S. T. Poon before the making of the Injunction Order. The judge indicated that Madam Chiu should be entitled to her share of the sale proceeds. IIL raised no objection. This was the basis upon which the Injunction Order was granted and the sale of the HK Property was completed subsequently. 

48.  On the evidence I accept that there was an agreement between HH Chun and Madam Chiu that they should sell the HK Property as joint tenants and thereafter should divide the sale proceeds between themselves in equal shares. A severance of the joint tenancy took place upon the sale of the HK Property. I also accept that Madam Chiu’s share of such proceeds (the Net Proceeds) should not be the subject matter of the Injunction Order and should be released to her.

49.  Ms Ho further argues that there is insufficient evidence to substantiate Madam Chiu’s equal contribution to the HK Property. This is, with respect, not a valid argument.

50.  As Slade LJ pointed out in Goodman v Gallant [1986] 1 All ER311 at 320e, it is of the very nature of a joint tenancy that, on a severance, each takes an equal aliquot of share according to the number of joint tenants. Absent any evidence pointing to other arrangements of distribution, in my view, Madam Chiu’s claim of the half share of the Net Proceeds must be accepted.

51.  In the premises, I opine that the Payment Out application should be allowed. Madam Chiu should be entitled to a payment-out of her half share of the Net Proceeds. She is also entitled to her half share of the apportionment sum to be received from Messrs. Kenneth C.C. Man & Co. while HH Chun’s share should become the subject matter of the Injunction Order.

Conclusion and Order

52.  For the reasons given above, I accede to the applications of HH Chun by the Variation Summons with the additional term set out in paragraph 42 hereof and the Payment Out Summons. The Disclosure Summons falls to be dismissed.

53.  HH Chun turns out to be the overall winner of the three summonses. There is no reason why costs should not follow the event. I therefore make an order nisi that IIL should pay the costs of HH Chun of each of the three summonses including all costs previously reserved thereof forthwith, to be taxed if not agreed.

54.  It remains for me to thank Ms Ho and Mr Lai for their succinct and helpful submissions.