WHARF LTD AND OTHERS v. LAU YUEN HOW AND OTHERS

HCA 1535 / 2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1535 OF 2008

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BETWEEN

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REASONS  FOR  DECISION

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A. Introduction

1.  This is the application by the 2^ndDefendant (Ms Liu) to vary the terms of the Mareva injunction granted against her on 17 August 2008^[1]. The injunction restrains her from disposing of, inter alia, the net proceeds (in the sum of about $2 million) of the sale of a residential property (“the Property”) in August 2008. The said proceeds have since been by stakeheld by Ms Liu’s solicitors.

2.  Ms Liu’s application is to ask the Court to allow the solicitors to release $1.9 million out of the stakeheld proceeds to enable her to pay for the legal fees to be incurred in her defence of a parallel criminal trial against her (and the other Defendants). The trial has been fixed to commence on 23 February 2010 for 20 days at the District Court.

3.  At the end of hearing, I dismiss Ms Liu’s application with reasons to be given later. This is what I do now.

B. Background

4.  The background relevant to this application has been helpfully summarized by Hon. Poon J at paragraphs 4 to 8 of his Reasons for Decision dated 3 September 2008 in dismissing Ms Liu’s then applications to (a) stay the proceedings, (b) impose an undertaking on the Plaintiffs and their solicitors not to disclose the materials obtained under these proceedings to the police in their criminal investigations against the Defendants, and (c) vary the Mareva injunction^[2].

5.  For the present purpose, I therefore hope I can be forgiven in quoting Poon J’s summary as follows:

“3.  The plaintiffs all belong to the Wheelock group of companies, providing various services to the group.  The 1^st plaintiff provides management services; the 2^nd plaintiff, management, accounting and taxation services; and the 3^rd plaintiff, hotel management services to the hotel business of the group.

4.  Prior to 23 July 2008, the 1^st plaintiff employed the 1^st defendant as its assistant payroll manager.  He alone handled the payroll of the senior staff (assistant general manager grade or above) in the Wheelock group.

5.  The 2^nd defendant is the 1^st defendant’s wife.  The 3^rd defendant is his sister.

6.  The plaintiffs’ complaint is this. In July 2008, the plaintiffs discovered that the 1^st defendant had between 13 May 2004 and 30 January 2008 falsified documents in 14 bank transactions involving a total of HK$8.5 million and diverted the same to the defendant’s bank accounts. Further, on 30 June 2008, the 1^st defendant fraudulently drew a cheque in the sum of HK$659,540 from the 1^st plaintiff’s HSBC bank account and made it payable to himself.

7.  On 20 July 2008, the plaintiffs reported the matter to the police. The police arrested the 3^rd defendant on 24 July 1008 and 1^st and 2^nd defendants on the following day. Holding charges were then laid against them. The 1^st defendant was charged with one count of attempted theft. The 2^nd defendant and the 3^rd defendant were respectively charged with two counts and one count of dealing with property known or believed to represent proceeds of indictable offence. They were all brought before the magistrate on 26 July 2008. The 1^st defendant was refused bail and has since been remanded in custody. The 2^nd and 3^rd defendants were granted bail. The case was adjourned to 22 September 2008 for mention. In the meantime, the Commercial Crime Bureau is still continuing with the investigation.

8.  On 1 August 2008, the 2^nd defendant entered into a sale and purchase agreement in respect of a property [i.e., the Property] in Tseung Kwan O that she bought in 2005. What she did alarmed the plaintiffs. On 17 August 2008, they successfully obtained the Mareva injunction against the defendants. Among other things, the defendants were ordered to disclose the their assets of an individual value of HK$50,000 by affidavit within 14 days from the service of the order.

6.  To the above summary, I should add the following.

7.  Ms Liu is eventually formally prosecuted for three charges of offences of dealing with the following property known or believed to represent the proceeds of indictable offences contrary to ss. 25(1) & (3) of the Organized and Serious Crimes Ordinance (Cap 455), namely:

(1)  $106,500 (over the period of 31 October 2001 to 16 January 2002).

(2)  $1,758,600 (over the period of 31 January 2002 to 25 July 2008).

(3)  The Property.

8.  The criminal trial due to commence in February is in relation to the above charges.  The suggested $1.9 million legal costs to be incurred are for (a) solicitors fees which are about $488,000, (b) Counsel’s fees (of a Senior Counsel and two junior Counsel) amounting to a total $1.4 million, and (c) miscellaneous charges.

9.  At the same time, the Plaintiffs are seeking and asserting in these civil proceedings, inter alia, proprietary claims against the Defendants (including Ms Liu) for the various alleged misappropriated funds, including the tracing of them to, inter alia, the Property and thus the proceeds of sale. The principal bases of the proprietary claims are that the funds were misappropriated by the 1^stDefendant in breach of trust and/or his fiduciary duties, and/or that Ms Liu had dishonestly assisted and/or had knowingly assisted the 1^stDefendant’s said breaches.

10.  From the time of the Mareva injunction to before the present application, under these civil proceedings, Ms Liu had engaged solicitors to prepare and file a total of 5 affirmations for various purposes, and counsel for the appearance before Poon J as mentioned above in support of her then applications.

11.  For the present application, Ms Liu is also represented by Counsel, and has also engaged solicitors to prepare 2 substantial affirmations in support thereof.

C. Relevant legal principles

12.  The parties are not in dispute as to the relevant applicable principles. They can be summarized as follows.

13.  The principles applicable to the release of funds to pay legal costs from an injunction involving proprietary claims are well settled. It is an exercise of discretion which involves a 2-stage process:

(1)  First, the defendant applying for the release of funds has to demonstrate with full and frank evidence that there are no alternative funds or assets available to him which can be used to pay his legal expenses other than the assets in respect of which the plaintiff brings the proprietary claim.  If the defendant fails in this first hurdle, the Court needs not consider the 2^ndstage and the application should be dismissed.

(2)  Secondly, once the first hurdle is cleared, the Court in the exercise of its discretion will engage in a balancing exercise to weigh the potential injustice to the plaintiff if releasing the funds against the possible injustice to the defendant of depriving him of the opportunity to have legal assistance in advancing what may eventually turn out to be a successful defence.  This process is a “careful and anxious judgment”, and the court is entitled to look at all relevant circumstances, and in particular, to weigh the relative strengths of the plaintiff’s proprietary claim in the funds and the defendant’s defence to that claim.  In relation to this, it is not sufficient for a defendant to merely establish that he has no other funds, for even so, he must also show that there is an arguable case for his having recourse to the funds in question, failing which, he has not right to use the money.  As Millet LJ (as he then was) said in Ostrich, infra, “[n]o man has a right to use somebody else’s money, for the purpose of defending himself against legal proceedings”.

See:  Ostrich Farming Corporation Ltd v Ketchell [1997] EWCA Civ 2953 (10 December 1997), per Roch LJ at page 10[3]; Liu Xian Feng v Liu Bo [2006] 4 HKLRD 33 (CA) at paras 10 & 11 (37B-H) per Le Pichon JA; Michael Chen Kang Huang v Peter Lit Ma  (unrep., HCSD 9/2007, 27 August 2007, Sakhrani J) at paras 23-28.

14.  In the case of an “ordinary” Mareva injunction, where there is no proprietary claim asserted against the enjoined assets, in the exercise of the Court’s discretion faced with an application to release the funds, the Court should consider whether the defendant has shown by sufficient evidence that (a) he does not have other assets available to meet the payment, and (b) the purpose of the application is not an attempt to dissipate the assets (which prima facie are the defendant’s) to frustrate the enforcement of judgment by the plaintiff. The rationale behind this is explained by Lloyd J in PCW (Underwriting Agencies) Ltd v Dixon [1983] 2 All ER 158 at pp 162 and 164:

“What should be the correct approach for the court to take in these circumstances?  The first reported case in which a similar question was considered is Iraqi Ministry of Defence v Arcepey Shipping Co SA, The Angel Bell [1980] 1 All ER 480, [1981] QB 65.  In that case Robert Goff J held that it was consistent with the policy underlying the Mareva jurisdiction that the defendant should be allowed to pay his debts as they fall due.  The purpose of the jurisdiction is not to secure priority for the plaintiff; still less, I would add, to punish the defendant for his alleged misdeeds.  The sole purpose or justification for the Mareva order is to prevent the plaintiffs being cheated out of the proceeds of their action, should it be successful, by the defendant either transferring his assets abroad or dissipating his assets within the jurisdiction: see Z Ltd v A [1982] 1 All ER 556 at 561, 571, [1982] QB 558 at 571, 584 per Lord Denning MR and Kerr LJ.  I am not going to attempt to define in this case what is meant by dissipating assets within the jurisdiction or where the line is to be drawn; but wherever the line is to be drawn this defendant is well within it.  It could not possibly be said that he is dissipating his assets by living as he has always lived and paying bills such as he has always incurred.  I say nothing about the costs of defending himself in these proceedings.  The Mareva jurisdiction was never intended to prevent expenditure such as this or to produce consequences such as would inevitably follow if this ex parte order is upheld.”

“The distinction between the ordinary Mareva plaintiff (to use Ackner LJ’s phrase) and the case where the plaintiff is laying claim to a trust fund on the so-called wider ground, is thus clear.  In the latter case the whole object is to secure the trust fund itself so that it should be available if the plaintiff should prove his claim.  In the former case by contrast the plaintiff is not entitled to any security.  The purpose of the jurisdiction, as is now clearly established, is not to provide the plaintiffs with any form of pre-trial attachment.  It is simply to prevent the injustice of a defendant removing or dissipating his assets so as to cheat the plaintiff of the fruits of his claim.”

These observations were adopted and followed in NMB Postbank Group NV v Naviede (No. 2)[1993] BCLC 715 at 717-718 per Chadwick J.

D.  The present application

15.  Bearing these principles in mind, I now proceed to deal with the application.

D1. Which principles governing the release of the enjoined funds should apply in the present application

16.  Mr Poon, counsel for Ms Liu, first submits that for the present application and notwithstanding the Plaintiffs’ asserted proprietary claims, it is the principles governing “ordinary” Mareva injunctions that should apply. This is so because, insofar as the sale proceeds of the Property are concerned (which is the only relevant subject matter of the Mareva injunction for the present purpose), the evidence clearly shows that they originated directly from Ms Liu’s own fund and did not come from or were linked to the Plaintiffs’ alleged misappropriated funds. Mr Poon’s arguments run as follows:

(1)  The sale proceeds of the Property represented the profits made by Ms Liu on the sale of the Property.

(2)  The purchase funds of the Property came from (a) the various profits made by Ms Liu in her previous 4 property transactions started in 1987, (b) the mortgage granted by the bank on the Property, and (c) the refinancing raised by last property which was not yet sold when the Property was purchased in 2005.

(3)  Given that the alleged misappropriation of funds only started to happen in the year between 2001 and 2002, it is thus clear that the funds which eventually went into the purchase of the Property could not be linked to these misappropriated funds.

(4)  In the circumstances, the sale proceeds of the Property belong entirely to Ms Liu’s own funds.  No real proprietary claim could be asserted against them.

17.  I reject Mr Poon’s submissions. In my view, the evidence is far from clear to show that the sale proceeds are not in any way linked to the misappropriated funds. My reasons are as follows:

(1)  It is also Ms Liu’s own evidence that for the purchase of the Property, $1,187,000 came from “[her] own money and borrow[ing] from relatives”.  This is a mere assertion, which only came after the Plaintiffs have made some sceptical observations in their rebuttal affirmation of her evidence.  She has for no good reasons failed to set out in the evidence how much she had borrowed from the relatives.  She has also not even identified these relatives and the proportion of funds coming from each of them.  She has similarly failed to say, insofar as part of this sum came from her own, what was the source of this unparticularized  “own” fund.

(2)  Although Ms Liu has repeatedly emphasized in the present application her right of silence and against self-incrimination to justify her position in not revealing her full case of the defence and not explaining the whereabouts of the various withdrawals from her bank account and the prima facie misappropriated funds, I do not see how this would justify the failure to provide the above mentioned evidence on the particulars of the alleged borrowing and own funds.  If she is right that the sum has nothing to do with the alleged misappropriated fund, there is nothing to prevent her from particularizing it and providing evidence in support.

(3)  Further, even in trying to set out the historic picture of the various profits and loss that she has made in the past 4 property transactions to justify that the funds used to purchase the Property came from her own source, Ms Liu has not in her evidence says that she had reinvested the profit made in each transaction into the next property transaction to support that there was a direct chain of flow of her own funds in these property transactions.  This does not therefore show that the funds used to purchase the Property came entirely or directly from her own money generated from the profit previously made, starting with the first property transaction.  Doing the best as he could, Mr Poon asked me to draw the inference.  I do not think Mr Poon is right.  First, the evidence as it now stands does not support that this is an irresistible inference that I can draw.  Secondly, as a matter of principle, for an application like this, Ms Liu (who is seeking the Court’s exercise of discretion) should not leave it to the Court’s inference when it is within her own ability to come up with the necessary clear, full and frank evidence to support her case.

(4)  For these reasons, Ms Lui has failed to demonstrate that the sale proceeds of the Property came from her own source and are not in any way linked to the misappropriated funds.

18.  I therefore conclude that the Ostrich 2-stage test applies to the present application.

D2. Has Ms Liu shown that she has no other means or assets to pay for the legal costs in the criminal proceedings

19.  After looking at the evidence globally, in my judgment, Ms Liu has failed to show by full and frank evidence that she has no other means than the enjoined funds to pay for the legal costs in the criminal proceedings. The following are my reasons:

(1)  In her evidence, Ms Liu says that, since the injunction and the freezing of all her financial assets in July 2008by the police, she has been living on financial contribution and the generosity of her relatives, and does not have any means to instruct solicitors to defend herself in the criminal case and the present civil proceedings.  Because of that, she could not even afford the fees to exercise her right at the preliminary enquiry before committal, or the fees to obtain proper advice on fact and evidence for the criminal trial PTR.

(2)  Notwithstanding the above, she has singularly failed to provide any evidence as to how she has managed to engage (and presumably pay) her lawyers (solicitors and/or counsel) to (a) draft and prepare at least 5 substantive affirmation already filed in these proceedings for various purposes, and (b) appear for her before Poon J to make the various applications at the hearing on 25 August 2008.  Similarly, there is no evidence to show how she is now able to engage solicitors to draft and prepare the 2 substantive affirmations in support of the present applications, and counsel to represent her today.

(3)  It must be noted that it is not her evidence that her relatives have been paying the legal fees for her.  It is also not her evidence that somehow these legal fees have not been paid.  It is similarly not her evidence that the unexplained funds withdrawal amounting up to some $1.7 million made between July and August 2008 were used to fund the legal costs.  Even giving full regard to her right of silence and against self-incrimination (being her reasons as to why she could not explain fully the withdrawals of these funds and their whereabouts), if any parts of these funds were used to pay for these legal fees, she should be able to do say so, as this would not infringe those rights of hers.

(4)  That shows that she has not come up with full and frank evidence to show clearly that she has no other source of means or assets to pay for the coming legal costs.

20.  Ms Liu in my judgment therefore fails to clear the first-hurdle in the 2-stage test. On this basis alone, her application should be dismissed[4].

21.  However, in case I am wrong in this conclusion, I would proceed to stage 2 of the test as follows.

D3. Stage 2 – balancing exercise

22.  Having regard to all the relevant circumstances, I would have also refused to exercise my discretion in favour of Ms Liu. This is so because:

(1)  For the same reasons set out in section D1 above, I think Ms Liu has failed to show that she has a good arguable case for the recourse to these funds.  In other words, I think there is at present a strong prima facie proprietary claim against the proceeds of the Property by the Plaintiffs.  This is of course a view based only on the interlocutory evidence now placed before me.

(2)  In the circumstances, the potential injustice to the Plaintiffs if releasing the funds far outweighs the possible injustice to Ms Liu of refusing her application.

E.  Conclusion

23.  For the above reasons, I dismiss Ms Liu’s application with costs to the Plaintiffs to be taxed if not agreed.

24.  I thank counsel for their assistance and succinctness in their submissions.