HANSEN INTERNATIONAL LTD v. HIGH FASHION APPAREL LTD AND OTHERS

HCA 1724/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.1724 OF 2014

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REASONS FOR DECISION

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INTRODUCTION

1. On 2 September 2014, Au-Yeung J granted an interim injunction (“2.9.2014 Injunction Order”) restraining the 2^nd and 3^rd Defendants (“Lam Sr” and “Lam Jr” respectively and “Lams” collectively) until the hearing of the inter partes Summons to be issued by the Plaintiff (“Hansen”) from, inter alia:

(1) acting on, implementing or carrying into effect the resolution to remove Ms Leong Ma Li (“Leong”) as the CEO of the 4^th Defendant (“New Media”) passed by the Lams at a board meeting of New Media on 22 August 2014;

(2) procuring the removal of Leong as New Media’s CEO in breach of the Joint Venture Agreement dated 26 November 2013 (“JV Agreement”) between Hansen and the 1^st Defendant (“HF Apparel”);

(3) taking any action or continuing to take any action to prevent, obstruct or delay Leong or the staff of New Media or the subsidiary companies under it (“Subsidiaries”), including Shenzhen Huijian Fashion Company Limited (“Huijian”) and Longford Information and Technology Company Limited (“Longford”), from having full access to New Media’s group’s online information technology system and network, including email accounts, computer and information network and system, and access to the work email network “@theme.com.hk”.

2. On 8 September 2014, following a hearing on 5 September 2014, Deputy High Court Judge B Chu made an Order (“8.9.2014 Injunction Order”) which, inter alia:

(1) continued the 2.9.2014 Injunction Order (“Paragraph 1”);

(2) compelled the Lams to hand over to Hansen, Leong or such person as may be designated by Hansen or Leong the finance chops, permits for Seal Engraving, bank account opening permits, organization credit code certificate, seal/signature specimen reserved with the banks, cheque books and stubs of used cheques and banking USB devices and to release to them all the bank account payment and enquiry passwords of Huijian on or before noon on 10 September 2014 (“Paragraph 2”);

(3) compelled the Lams to withdraw any notice or instruction they had given to any bank to notify the same that Leong had been removed as New Media’s CEO, or to freeze the bank accounts or otherwise disrupt the provision of banking facilities and services to New Media and the Subsidiaries on or before noon on 10 September 2014 (“Paragraph 3”),

upon Summonses issued by Hansen on 3 and 4 September 2014 for such and other orders.

3. Her Ladyship adjourned the substantive hearing of Hansen’s said Summonses as well as the Summons issued by HF Apparel and the Lams (“Defendants” when referred to collectively) on 4 September 2014 to discharge the 2.9.2014 Injunction Order to a date to be fixed and gave directions for such hearing.  The only issue that Deputy Judge Chu dealt with at the hearing on 5 September 2014 and in the reasoned Decision handed down on 8 September 2014 (“8.9.2014 Decision”) was whether there should be interim injunctions in place as sought by Hansen pending the substantive hearing.  Paragraph 1 was expressly made effective until the determination of Hansen’s Summonses or until further order.

4. By a Summons issued on 10 September 2014 before the deadline imposed for compliance with Paragraphs 2 and 3, the Defendants apply for

(1) leave to appeal against the 8.9.2014 Injunction Order and stay of execution pending appeal if leave be granted (“Leave and Stay Application”); and

(2) interim suspension of Paragraphs 2 and 3 pending the hearing and determination of the Leave and Stay Application (“Interim Suspension Application”).  

5. Such summons came before me in the morning on 10 September 2014.  I directed that the Leave and Stay Application be listed for hearing and determination by Deputy Judge Chu in the usual manner but adjourned the hearing of the Interim Suspension Application to 11 September 2014 to enable Hansen to be represented and heard.  In the meantime, I extended the time for the Lams to comply with Paragraphs 2 and 3 to after the determination of the Interim Suspension Application.

6. On 11 September 2014, after hearing the parties, I ordered:

(1) the suspension of operation of Paragraph 2 until the determination of the Leave and Stay Application or until further order on the conditions[1] that the Lams do or do procure their proxies or agents or servants to

(a) hand over all the documents, articles and information mentioned in Paragraph 2 to Hansen’s solicitors as stakeholders;

(b) revise the mandate in respect of each of the bank accounts of Huijian wherever located to render all such accounts operable only by the joint signatures of one representative nominated by each of Hansen and HF Apparel,

both conditions to be complied with before 4:30 pm on 12 September 2014; and

(2) the suspension of operation of Paragraph 3 until the determination of the Leave and Stay Application or until further order, subject to the Lams’ undertaking not to operate any of the bank accounts of Longford whether by themselves or their proxies, agents or servants.

7. I now give reasons for such order.

REASONS FOR ORDERS IN PARAGRAPHS 2 AND 3

8. As noted in paragraphs 4, 8 and 66 of the 8.9.2014 Decision, both Au-Yeung J and Deputy Judge Chu had the benefit of legal submissions from Mr Jose Maurellet, Counsel for the Defendants, but not evidence from the Defendants due to the urgency with which Hansen’s applications came on for hearing.  Deputy Judge Chu accepted Mr Maurellet’s submissions that the hearing before her was really still at the ex parte stage.

9. Hansen’s allegations against the Defendants and the evidence thereon as at the hearing before Deputy Judge Chu on 5 September 2014 have been set out in detail in the 8.9.2014 Decision, to which I refer but do not need to repeat for present purposes.

10. Insofar as the application for the mandatory injunctions in terms of Paragraphs 2 and 3 is concerned, it is sufficient for me to recap that, as far as I can discern from Leong’s Affirmations dated 2 and 4 September 2014, Hansen’s case was premised upon the following contentions:

(1) Pending final resolution of the dispute herein, it is in the interests of the parties that the normal business and operations of the joint venture between Hansen and HF Apparel (“Joint Venture”) should continue.

(2) The operational bank accounts of the Brand Centre (as defined in paragraph 14 of the 8.9.2014 Decision) are held under the names of Huijian and another PRC company called 榮暉服飾 (深圳) 有限公司 (“Shenzhen Company”).

(3) Leong required the articles, documents and information mentioned in Paragraph 2 for the full operation of these bank accounts, without which expenses (some of which would fall due before the Mid Autumn Festival) could not be paid and the normal business and operations of the Joint Venture could not be continued.

(4) Further, Leong was the Legal Representative of both Huijian and the Shenzhen Company.  As such, she was entitled to possess and safe keep these companies’ finance chops, banking USB devices and bank account passwords, and the Lams had no right or legitimate reason to remove/withhold the same from her but did so to render Huijian and the Shenzhen Company incapable of operating their bank accounts, thereby disabling them from conducting their usual business and operations.

(5) As the Legal Representative of Huijian and the Shenzhen Company, Leong was also responsible for ensuring the payment of, inter alia, staff salaries, rental and taxes of these companies.

(6) Although Leong has all the chops necessary for the operation of Longford’s bank accounts, she could not access Longford’s accounts with ICBC by reason of the suspension of those accounts by notice from the Lams to the bank that Leong had been removed as CEO.  She feared that the Lams might have given similar notices to other banks.

(7) On 25 August 2014, transfers in amounts totalling RMB10,800,000 were made from the accounts of Huijian and the Shenzhen Company with the Bank of China and the China Merchants Bank to one Yihao Fashion Company Limited, a company of the High Fashion Group but outside the Joint Venture, without Leong’s approval contrary to the internal control protocol of New Media.

11. Deputy Judge Chu granted the mandatory injunctions in terms of Paragraphs 2 and 3 to enable the normal operations of New Media and the Subsidiaries to continue, until the substantive hearing of the 3 Summonses by Hansen and the Defendants.  See paragraph 85 of the 8.9.2014 Decision.

12. In this regard, Deputy Judge Chu did not consider the undertakings offered by the Lams to procure the payment of

(1) the salaries of all employees of New Media and the Subsidiaries by 10 September 2014;

(2) the salaries of all employees of Longford by 15 September 2014;

(3) the rent payable in respect of the premises in Shenzhen where New Media operates a branch office for the month of September by 11 September 2014; and

(4) the monthly business tax to 待核對税款專戶by the due date,

to be sufficient to meet Hansen or Leong’s concerns, as the undertakings offered in respect of the first 3 items of expenditure did not extend beyond 15 September 2014.

13. For the sake of completeness, her Ladyship limited Paragraph 2 to Huijian and declined to grant any injunction orders in respect of the Shenzhen Company for 2 reasons:

(1) First, the Shenzhen Company does not appear from the evidence before her to be a company within the Joint Venture.

(2) Second, there is a clear dispute as to Leong’s appointment as the Legal Representative of the Shenzhen Company. 

See paragraphs 78-80 of the 8.9.2014 Decision.

GROUNDS FOR AND EVIDENCE IN SUPPORT OF INTERIM SUSPENSION APPLICATION

14. In support of the Stay Application and the Interim Suspension Application, Lam Sr made an Affirmation on 10 September 2014, the primary purpose of which was to demonstrate the existence of an appreciable risk that the Defendants’ intended appeal against the 8.9.2014 Injunction Order, even if successful, would be rendered nugatory if there be no stay of execution of Paragraphs 2 and 3 pending appeal or if there be no interim suspension pending the grant of such stay. 

15. This is so because compliance with Paragraphs 2 and 3 by the Lams would enable Leong to manipulate without any control vast sums of money of the Joint Venture. 

16. Leong was said to be untrustworthy of such a position due to the following alleged acts of dishonesty:

(1) First, Leong had misused the chops of the Shenzhen Company (which, to Leong’s knowledge, is not a company under the Joint Venture but a subsidiary of the High Fashion Group holding RMB200 million worth of real estate in Shenzhen) to make herself the Legal Representative of the Shenzhen Company, in place of Lam Jr, with effect from 1 July 2014.  This was discovered on 21 August 2014 and has since been made the subject-matter of a complaint by the Shenzhen Company against Leong to the Shenzhen police.  According to the Defendants, it was such discovery that provoked their actions against Leong on 22 August 2014.

(2) Second, Leong had without authorisation caused New Media to enter into 2 contracts, which contained terms which are highly disadvantageous to New Media, with Taiwan Vision Company Limited in June 2014 and had further deliberately concealed the making of such contracts from the Defendants.

(3) Third, the agreed internal protocol for the operation of Longford’s accounts with ICBC Shanghai (including what is called the Longford ICBC Capital Account into which holds the capital contributions for the setting up of the Joint Venture in the sum of RMB30 million) required the joint signatures of representatives nominated by each of Hansen and HF Apparel (e.g. Leong and Lam Jr or Leong and Angela Yau, New Media’s CFO). 

(4) After making herself the sole signatory of these accounts, Leong made 2 attempts to withdraw RMB10 million from the Longford ICBC Capital Account.  Such attempts were however not successful and the Lams were alerted by the bank on 26 August 2014.

17. The third-mentioned matter was before Deputy Judge Chu in the form of an allegation made in a letter dated 27 August 2014 from Messrs Wilkinson & Grist for the Defendants to Leong but was not properly adduced in evidence.

18. Lam Sr’s Affirmation also put into dispute Leong’s appointment as the Legal Representative of Huijian as at the hearing before Deputy Judge Chu by the production of Huijian’s latest Enterprise Legal Person Business Licence, from which it appears that Lam Jr has become the Legal Representative of Huijian as from 1 September 2014.  The removal of Leong as the Legal Representative of Huijian was mentioned by Mr Maurellet at the hearing on 5 September 2014 but again it was not supported by evidence.

HANSEN’S EVIDENCE OPPOSING INTERIM SUSPENSION

19. In reply, at the hearing on 11 September 2014, I was shown a draft of Leong’s 3^rd Affirmation, which I read and took into consideration subject to an undertaking to have it made and filed in due course. 

20. In short, Leong denied that she had attempted to withdraw RBM10 million from the Longford ICBC Capital Account whether as alleged or at all and explained why she could not have done so given the nature of such account and the application of stringent PRC foreign exchange regulations to Longford (with which Leong could not have complied). 

21. With regard to Longford’s accounts with ICBC, I note that Leong has not denied that she is the sole signatory.  Her case on this seems to be that she has always been the sole signatory.

22. Although Leong did not deal with the other cross-allegations made against her for lack of time, she said that the falsity of the allegation concerning the Longford ICBC Capital Account would demonstrate how utterly wrong and unreliable Lam Sr’s remaining evidence was.

ANALYSIS

23. Mr Maurellet (appearing with him Mr Justin Lam) referred me to Stone J’s judgment dated 30 August 2001 in Jau-Hua Stewart v E Excel Limited, HCA 2493/2001, in which Stone J stayed the proceedings in favour of the US court, set aside the writ and service thereof upon the 2^nd to 5^th defendants for want of jurisdiction and discharged the Mareva injunction against all the defendants but ordered the interim suspension of the operation of these orders until 5 September 2001 to enable Counsel for the plaintiff to take the matter further, if so instructed.  

24. It was however unnecessary for Stone J to go into the principles governing the interim suspension of a court order as Counsel for the defendants did not object in principle.

25. Mr Jenkin Suen (appearing with him Ms Ebony Ling), Counsel for Hansen, accepted the Court’s inherent jurisdiction to suspend the operation of its order in appropriate circumstances.

26. What then are the appropriate circumstances?  I do not think they can be exhaustively listed for all cases and I do not purport to do so.  

27. Specifically confining myself to the situation before me, I consider this to be a proper case for interim suspension after taking into account and weighing the following matters:

(1) First, submissions were made for both sides with reference to the test for the grant of a stay of execution pending appeal, which requires the intended appeal to be arguable (in the sense of having reasonable prospects of success).  However, given that interim suspension was sought pending the hearing and determination of the Leave and Stay Application, it appears to me to be sufficient if the Leave and Stay Application is bona fide and not unarguable.

(2) Second, the orders sought to be suspended here are only interim in effect, pending the substantive hearing of an application for interlocutory injunctive relief in the same terms pending trial. 

(3) In particular:

(a) Deputy Judge Chu accepted that the matter was still at the ex parte stage.  She was certainly conscious that the evidence upon which she granted the 8.9.2014 Injunction Order (including Paragraphs 2 and 3) might be one-sided.  See paragraph 8 of the 8.9.2014 Decision. 

(b) The Court would, therefore, have to be mindful of and be responsive to the evidence as it developed in any event, regardless of whether there was or was not any appeal.

(c) On this, without intending to encourage parties to think that they could have as many bites of the cherry as they wish, in this case, I was not at all impressed by Hansen’s observation that the Defendants could have adduced the evidence contained in Lam Sr’s Affirmation at the hearing before Deputy Judge Chu on 5 September 2014. Given that that hearing took place on the day following Hansen’s Summons dated 4 September 2014 for orders in terms of Paragraphs 2 and 3, there was simply no or no sufficient opportunity for the Defendants to do so. 

(d) It was therefore impossible for me to ignore the alleged misconduct by Leong now deposed to by the Defendants, especially that of a financial nature and the risks of damage to the business and operations of the Joint Venture that might arise if Paragraphs 2 and 3 were carried into immediate effect before a determination of these allegations.  I say so without losing sight of the fact that they remain just allegations, which are yet to be proved.  However, they did raise serious issues to be tried as to which side was in breach of the JV Agreement.

(e) Indeed, the mandatory injunctions ordered in Paragraphs 2 and 3 were granted in the first place to address a similar risk, though seen from the point of view of Hansen as being posed by the Defendants’ alleged misconduct.  Such injunctions aimed to enable the normal business and operations of the Joint Venture to continue, in order not to render the resolution of the disputes for which these proceedings were instituted nugatory for the successful party.

(f) It is trite that the Court should not grant interlocutory injunction relief, especially mandatory ones, of a scope or in terms that are wider than is necessary.

(g) Where the same balance could be struck and the risks of damage alleviated by less draconian means, suspension of an interim injunction could, in my view, be more readily granted.  

(h) I believe the 2 conditions attached to the suspension of operation of Paragraph 2 would remove the funds in Huijian’s bank accounts from the sole control of either party and put in place much needed checks and balances in the deployment of those funds to the normal business and operations of the Joint Venture.

(i) As for Paragraph 3, it would affect mainly Longford’s bank accounts, the operation of which is not normally required for the business of the Joint Venture.  The suspension of operation of Paragraph 3 subject to the Lams’ said undertaking would prevent either side from accessing such accounts thereby preserving the funds therein. 

[1] These conditions were agreed between the parties in the course of argument if I should be minded to order suspension.