RACP PHARMACEUTICAL HOLDINGS LTD v. LI XIAOBO

cacv 139/2007

in the high court of the

hong kong special administrative region

court of appeal

civil appeal no. 139 of 2007

(on appeal from HCA NO. 490 of 2007)

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J U D G M E N T

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Hon Rogers VP:

1.  I agree with the judgment of Le Pichon JA.

Hon Le Pichon JA:

2.  This is an appeal from part of the order dated 4 May 2007 of Yam J (“the Order”) requiring the defendant to disclose the bank statements of two named accounts from 1 June 2006 to the date of the Order, to disclose details of payments made by him from those accounts, and to make and serve on the plaintiff a further and better affidavit disclosing all bank accounts owned by him whether solely or jointly, worldwide, from 1 June 2006 to the date of the Order.

Background

3.  The plaintiff, a US corporation, acquired from the defendant, for US$11.25 million, all the shares of a Singaporean company which in turn held the entire share capital of the PRC company.  The purchase price was transferred by the plaintiff into the defendant’s account with HSBC in Hong Kong (“the Hong Kong account”) on 1 June 2006.  The plaintiff claims that it subsequently discovered that the receivables of the company had been overstated by about RMB26 million.  It then caused a writ to be issued against the defendant for damages for deceit and alternatively, damages for breach of the stock purchase agreement.

4.  On 9 March 2007, the plaintiff obtained an ex parte Mareva injunction against the defendant freezing his assets worldwide, with leave to serve out of the jurisdiction.  No ancillary disclosure order was made at the time.  Another ex parte order was obtained on 12 March 2007 allowing the plaintiff to inspect the latest bank statements of the defendant’s Hong Kong account.

5.  Subsequently, by an order made on 30 March 2007 (“the March order”), the defendant was required to disclose his worldwide assets exceeding HK$100,000 by 10 April 2007.  This appears to be a typographical error inasmuch as it appears from the court’s record of the order made by Deputy Judge Muttrie that the defendant was given 14 days from the date of the March order to make disclosure of his worldwide assets.  This is consistent with the sixth affirmation of Ip Woon Shun, the plaintiff’s handling solicitor, where reference was made in paragraph 6 to the defendant’s compliance with the deadline of 13 April 2007.  The defendant’s solicitors had filed an affidavit that day exhibiting, inter alia, an affirmation made by the defendant in Vancouver on 12 April 2007, exhibiting a list of assets of an individual value in excess of HK$100,000 as at 12 April 2007 (“the list of assets”).

6.  The summons culminating in the Order that is the subject of the present appeal was issued on 25 April 2007.  Paragraph (1) of the summons sought the disclosure of the bank statements of the joint account of the defendant and his wife with HSBC (Vancouver) (“the Vancouver account”) and the defendant’s account with Huaxia Bank which accounts are hereafter collectively referred to as “the two bank accounts”.  Paragraph (2) sought the details of payments made by the defendant from the two bank accounts including the date, the amount, the beneficiaries and the purpose of the payments.  Paragraph (4) sought further and better disclosure by the defendant of all bank accounts owned by him solely or jointly maintained at any bank or financial institution worldwide from 1 June 2006 to the date of the Order.  The judge made an order in terms.  Although no written reasons were given, I have had the opportunity of listening to the recording of the proceedings.  It would appear that the judge accepted the submissions of Mr Harry Liu, counsel then appearing for the plaintiff, and made an order in terms.

This appeal

7.  The appeal only relates to paragraphs 1, 2 and part of paragraph 4 of the Order.  Mr Pow SC who appeared for the defendant put his appeal on two grounds: first, the judge was wrong in law in granting the disclosure orders on the basis that the plaintiff’s claim was a proprietary claim at the time it applied for the Mareva injunction; and second that, in any event, the disclosure orders were not properly in aid of the Mareva injunction.

Nature of the plaintiff's claim

8.  The ex parte Mareva injunction was obtained on the basis of a draft writ in which the causes of action were damages for the tort of deceit and, in the alternative, for damages for breach of the stock purchase agreement.  The concurrent writ issued and served the following day was in the same form.  The causes of action remained unchanged when the matter came before the judge.  There was no claim made for restitution based on rescission.  Indeed, the “Form 10-QSB” filing made by the plaintiff with the US Securities and Exchange Commission for the period ended March 31, 2007 refers to the action against the defendant as one for damages for breach of representations and warranties.

9.  Further, it appears from the filing that the plaintiff as beneficial owner of the issued share capital the PRC company has been exercising its rights of management over that company, moving “aggressively to stabilise” its operations.  The plaintiff has also chosen to reallocate that part of the receivables purchased it considered was nonexistent to buildings and land use rights.  All that appears to suggest that notwithstanding its discovery of the inflated receivables, it has continued to exercise its rights as shareholder to manage the PRC company.

10.  Be that as it may, the crucial question is the basis upon which the judge made his order.  As noted above, he accepted the submissions of the plaintiff’s counsel.  I have had the opportunity of reading Mr Liu’s written skeleton filed for the hearing.  Paragraph 7(2) reads as follows:

“	7.	At this stage P can at least identify the following potential good arguable claims against D:-
			…
		(2)	A proprietary claim to the monies in D’s HK Account, as well as its proceeds …”

Then a discussion followed at §§ 18 to 21 on “Disclosure in aid of proprietary claim”, citing A v. C [1981] 1 QB 956.  That was an action alleging a conspiracy to defraud and one of the causes of action was a tracing claim of monies paid under a mistake of fact induced by the fraud.  In oral argument before the judge, counsel for the plaintiff maintained the position he had taken in his skeleton and in reply to the point made by counsel for the defendant regarding the absence of any proprietary claim and the absence of any claim for mistake and constructive trust, he stated that he was certain that ‘mistake’ had been alluded to in the skeleton before Deputy Judge Gill when the Mareva was first obtained.  Pausing there, I would observe that Deputy Judge Gill was only involved at the subsequent hearing increasing the amount frozen to US$10 million.  The order granting the Mareva on 9 March was made by Deputy Judge Muttrie.  Be that as it may, I have located and read the relevant skeletons from the court file and neither the skeleton filed by counsel then appearing for the plaintiff before Deputy Judge Muttrie or that before Deputy Judge Gill had made any reference to ‘mistake’.

11.  In accepting the plaintiff’s submissions, the judge must have accepted that the cause of action was one involving a proprietary claim.  But no such cause of action appears in the writ.  The supporting affirmation filed stated that “the main argument advanced by the Plaintiff is based on deceit”.  Although statement of claim includes a restitutionary claim based on rescission, it was not filed until 28 June 2007 which was well after the date of the hearing below.  I would agree with Mr Pow that the Mareva injunction was obtained and granted on the basis of a claim for damages for deceit and that remained the basis of the injunction when the limit was increased from US$6 million to US$10 million on 15 April 2007, when all the affirmation in support did was to update the plaintiff’s assessment of ‘damages’, with the assistance of forensic accountants.

12.  The claim for damages continued to be the basis as at the date of the hearing below.  But absent a proprietary claim or a claim for tracing relief, the disclosure orders could not be said to be in aid of the Mareva injunction.  Although there was some attempt at relying on mistake and restitution at the hearing below, at the very least, it is doubtful whether the plaintiff could now seek to rescind in view of the matters referred to in paragraph 9above.  The plaintiff may well have disentitled itself through acquiescence for seeking restitution.

Whether the Order was properly in aid of the Mareva injunction

13.  Mr Pow SC submitted that, in any event, the disclosure orders in paragraphs 1 and 2 of the Order were not relevant or pertinent to the effective operation of the Mareva injunction.  As noted above, the defendant was required by the March to disclose his worldwide assets in excess of HK$100,000 by 14 April 2007.  However, it is relevant to note that on 23 March 2007, the plaintiff obtained an order from Saw J allowing it to obtain discovery of all entries in the banker’s record of the Hong Kong account for the period from 2 June 2006 to 16 March 2007.  It is unclear when the plaintiff obtained this discovery except that it must have been after 23 March 2007.  The summons leading to the Order that is the subject matter of the present appeal was not taken out until 25 April 2007, some 2 weeks after the plaintiff had provided his list of assets in compliance with the March order.  But as a result of that discovery, the plaintiff came to know that on 20 June 2006 the defendant had remitted US$5 million to the Vancouver account and on 24 August 2006, he had remitted a further US$5 million to his account with Huaxia Bank.

14.  It was said that given this background, it was not surprising that the judge made the disclosure orders.  Implicit in the plaintiff’s submission is the suggestion that the two accounts would not have come to light but for the discovery order of Saw J.  As such, it is nothing but a thinly veiled allegation that the defendant had breached the March order by not disclosing the existence of the two accounts.  As to this, I make two observations: first, the failure to include the two accounts in the list of assets, of itself, does not show any non-compliance with the March order.  The defendant’s obligation was to disclose assets having a value of HK$100,000 or above.  If the balance standing in each of the two accounts did not reach this amount, clearly the defendant did not have to disclose the existence of those accounts.  It would also follow that there would not have been any non-compliance.  Second, although the two accounts do not feature in the list of assets, the defendant’s affirmation exhibiting the list of assets made specific reference to and disclosed the existence of the Vancouver account which had a current balance as at 12 April 2007 of CAD5000 (which is considerably less than HK$100,000) and which, in any event, had already been frozen by the plaintiff.  In my view, I can see nothing in the relevant background that would justify the disclosure orders.

15.  In the sixth affirmation of Ip Woon Shun filed in support of the disclosure application, the reasons for seeking the disclosure orders appear in paragraph 16:

“	…in order to understand how the Defendant dissipated, or alternatively concealed, his assets.  They are relevant and necessary for the proper understanding of the fraud perpetrated against the Plaintiff and tracing the monies paid by the Plaintiff to the Defendant on 2nd June 2006.”

As already explained, the last sentence is misleading because the plaintiff did not ask for ‘tracing relief’ in its writ.  Absent evidence that the defendant had failed to comply with the Mareva injunction, there is no basis for further discovery.  Discovery directed at finding out whether the defendant had ‘dissipated’ or ‘concealed’ the purchase monies, in other words, ‘policing’, is not a legitimate purpose for making a disclosure order.  See Bekhor & Co Ltd v Bilton [1981] 1 QB 923 at 944G-945D.  Although Ms Tam SC, who appeared for the plaintiff, attempted to distinguish that case on the basis that the defendant in that case had given an undertaking to the court not to change the investment of his assets within the jurisdiction so as to reduce their value, I do not consider that Bekhor is distinguishable on that basis.  The absence of an undertaking would not render the principle stated inapplicable.

Conclusion

16.  Accordingly, I would allow this appeal and order that (a) paragraphs 1 and 2 of the Order be set aside; and (b) paragraph 4 of the Order be varied so that the defendant is only required to disclose all his bank accounts and their balances worldwide as of the date of the Order.

17.  I would also propose that an order nisi of costs be made that (1) the costs of this appeal be to the defendant, and (2) the costs order below be set aside and that the defendant be entitled to one half of the costs below.

Hon Rogers VP:

18.  Accordingly, there will be an order in terms of paragraphs 16 and 17 above.