XY, LLC v. JESSE ZHU (a.k.a. JIA-BEI ZHU and JESSE JIA-BEI ZHU) AND ANOTHER

CACV 11/20 16

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 11 OF 2016

(ON APPEAL FROM HCMP NO. 869 OF 2014)

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J U D G M E N T

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Hon Kwan JA:

1.  This is an interlocutory appeal brought by the 2^nd defendant, Grand Network Technology Limited (“GNT”), against the decision of Au-Yeung J on 13 November 2015 (“the Decision”) dismissing its summons to discharge a Mareva injunction granted by L Chan J on 7 April 2014 (“the HK Mareva”). The 1^st defendant, Jesse Zhu, has chosen not to appear in these proceedings and does not take part in this appeal.

2.  The HK Mareva, made against Jesse Zhu and GNT, is ancillary to a Mareva injunction granted against them by Fitzpatrick J of the Supreme Court of British Columbia, Canada, on 27 March 2014 (“the Canadian Mareva”).  It was made pursuant to sections 21M and 21N of the High Court Ordinance, Cap 4, by which the court is empowered to grant an interlocutory injunction to facilitate foreign proceedings and where no substantive proceedings are contemplated in Hong Kong.

3.  The plaintiff, XY LLC (“XY”), only has a cause of action against Jesse Zhu (the cause of action defendant; “the CAD”), it does not have a substantive cause of action against GNT (“the NCAD”).  At issue in this appeal is whether the judge was correct to exercise her discretion to grant an injunction of the type in TSB Private Bank International SA v Chabra & Anr [1992] 1 WLR 231, in which a Mareva injunction is granted against an NCAD, to ensure the effectiveness of a freezing injunction in respect of the assets of the CAD and to assist enforcement of any judgment against the CAD.

Background

4.  I gratefully adopt the relevant background matters set out by the judge in §§4 to 21 of the Decision:

“ 4.   On 20 March 2008, the plaintiff commenced action in Canada against Jesse Zhu and others including one Ms Zhou claiming damages for conspiracy, deceit, breach of confidence, breach of contract, and inducing breach of contract.  Thereafter, 2 actions of the plaintiff were consolidated and heard together (“Original Action”).

5.   On 2 March 2012, following a 30 day trial of the Original Action, Kelleher J gave judgment for the plaintiff and found Jesse Zhu, Ms Zhou and others liable to the plaintiff in, amongst others, damages in the sum of CAD8,507,891, together with interest and special costs (“the Monetary Judgment”).  Jesse Zhu and others had appealed to the Court of Appeal but were unsuccessful.  On 20 February 2014, their application for leave to appeal to the Supreme Court was dismissed.

6.   Meanwhile, on 30 March 2012, the plaintiff commenced the “Topsires Action” against Jesse Zhu and others upon discovering that Jesse Zhu had set up a new company to make use of the plaintiff’s property and equipment.

7.   On 28 February 2014, following the Supreme Court’s dismissal of the application for leave to appeal, the plaintiff and Ms Zhou entered into a Settlement Agreement to limit the liability of Ms Zhou in return for her assistance to the plaintiff in pursuing against Jesse Zhu.

8.   Based on information from Ms Zhou, on 25 March 2014, the plaintiff, as judgment creditor, (i) commenced the “Recovery Action” with a view to enforcing the Monetary Judgment against the assets of Jesse Zhu, including GNT; and (ii) made an application in Vancouver for Mareva injunctions on an ex parte basis in the Original Action, the Topsires Action and the Recovery Action.

9.   On 27 March 2014, Fitzpatrick J of the Supreme Court of British Columbia granted the Canadian Mareva against, amongst others, Jesse Zhu and GNT restraining them from:

(a)   removing from British Columbia or in any way disposing of or diminishing the value of any assets in British Columbia whether in its name or not and whether owned solely or jointly; and

(b)   removing or in any way disposing of or diminishing the value of any worldwide assets whether in their own name or not and whether owned solely or jointly.

10.   The Canadian Mareva specifically covered an account at HSBC no. 808-735229-838 registered in the name of GNT in Hong Kong (“the HK Account”).

11.   It was specifically provided in the Canadian Mareva that:-

(a)   it would remain in force up to and including 25 April 2014 unless it was varied or discharged by a further order of the Court before then; and

(b)   the Canadian Mareva did not affect any person or legal entity outside the jurisdiction of the Canadian Court until it was declared enforceable or was enforced by a court in the relevant jurisdiction;

12.   Clearly, the Canadian Court envisaged that the Hong Kong Court would have to give an order with regard to assets in Hong Kong.  In fact, during the application for injunction in Canada, the Supreme Court of British Columbia was told that the plaintiff intended to mount an enforcement action in Hong Kong.  The Canadian Court thus sealed up all the materials relating to the Canadian Mareva and the other two orders until 14 April 2014 to maintain secrecy pending the application in Hong Kong. The Canadian Mareva was only served after the plaintiff obtained the HK Mareva.

13.   On 7 April 2014, the plaintiff issued the present originating summons and obtained the HK Mareva in aid of the enforcement of the Monetary Judgment.  It prohibited Jesse Zhu and GNT from disposing of or diminishing the value of their assets in Hong Kong, whether in their own name or not, and in particular, the HK Account.

14.   The HK Mareva was extended until further order on the return date of 17 April 2014, by DHCJ Wilson Chan.  That hearing was uncontested despite Jesse Zhu and GNT being served properly.

15.   After the HK Mareva was granted, an inter partes hearing took place before the Canadian Court on 22 to 25 April 2014. Some of the defendants (including Jesse Zhu) were legally represented, but not GNT. Following argument, Fitzpatrick J. ordered on 25 April 2014 that, amongst others, (i) the Canadian Mareva would remain in force until further order of the Court; and (ii) Jesse Zhu, GNT and third party banks shall make disclosure in the Recovery Action (“the Canadian Disclosure Order”).

16.   On 12 February 2015, the plaintiff issued the present Disclosure Summons[1].

17.   On 26 May 2015, an order in terms of the Originating Summons in these proceedings was made against Jesse Zhu, who did not appear despite having been served.  GNT entered an appearance by solicitors and counsel but did not “oppose” the application.  The Court ordered that there be a further directions hearing of the Originating Summons but, in the meantime, the HK Mareva against GNT be continued until further order.

18.   On 6 July 2015, GNT issued the Discharge Summons, and the Release and Fortification Summons.

19.   On 28 August 2015, after a contested hearing, Kelleher J of the British Columbia Supreme Court handed down a judgment (“the Contempt Judgment”) finding Jesse Zhu to be in contempt of court orders.

20.   On 3 September 2015, the plaintiff obtained, in default, final judgment on liability from McEwan J in the Recovery Action against, amongst others, GNT (“the Canadian Final Judgment”).  The material parts provide that:

(1)   GNT holds its assets including any funds in trust for Jesse Zhu;

(2)   The Plaintiff shall recover judgment from, amongst others, GNT in the amount of CAD$9,980,650;

(3)   The Canadian Mareva shall remain in full force and effect until such time as the judgments in the Recovery Action and Original Action have been satisfied.

21.   On 5 October 2015 GNT applied in Canada to set aside the Canadian Final Judgment.”

5.  GNT was incorporated in the British Virgin Islands on 2 May 2000.  Jesse Zhu has never been a shareholder or director.  Its first shareholder was Peter Wang Shu Xi, the brother-in-law of Jesse Zhu.  On 28 August 2000, Peter Wang and Hui Zong were appointed its first directors.  Peter Wang and Hui Zong were employed by companies in the IND Group, a group of companies controlled by Jesse Zhu with operations in Canada and China.

6.  Peter Wang was the sole shareholder of GNT until 16 April 2009 when he transferred 50% of his shares to Ms Zhu Qian and his wife Ms Li Hui Ping each.  Ms Zhu is a cousin of Jesse Zhu and was employed as a laboratory technician in the IND Group in the PRC.  Ms Li was employed as a cleaner at the IND Group in Beijing. Ms Zhu and Ms Li replaced Peter Wang and Hui Zong as the directors on 16 April 2009.  In early January 2014, Peter Wang passed away[2].  On 30 September 2014, Ms Li transferred her shares to Ms Wang Zhaoyan.  On the same day, Ms Li ceased to be a director and Ms Tong Nini was appointed in her place.  Ms Wang was appointed a director on 1 January 2015.  The directors who remain on the register of directors of GNT are Ms Zhu Qian, Ms Tong Nini and Ms Wang.

7.  Ms Wang has deposed in these proceedings that the funds in the HK Account are the only assets of GNT.  As on 17 April 2014, shortly before the HK Mareva was continued by DHCJ Wilson Chan, the balance in the HK Account stood at $38,214,589.45 (about 30% of the judgment sum).  After that, $119,373.20 and $700,000 were withdrawn as legal fees for GNT in these proceedings, with the consent of XY[3].

8.  The case of XY against GNT was based primarily on the evidence and contemporaneous documents provided by Ms Selen Zhou, a former employee of the IND Group and a defendant in the Original Action.  Ms Zhou reached a settlement with XY in February 2014.  In exchange for full and frank disclosure of information about the other defendants, XY agreed to limit her liability and her payments may be further reduced if the information she provided helps XY to recover the Monetary Judgment.

This appeal

9.  GNT applied to the judge for leave to appeal against the dismissal of the Discharge Summons.  On 8 January 2016, the judge handed down her decision granting leave to appeal (“Leave Decision”).

10.  Two grounds of appeal were advanced in the draft notice of appeal considered by the judge.  She was not satisfied that ground 1 (that she erred in finding the Canadian Final Judgment as decisive or should be given very weighty consideration) has reasonable prospects of success.  She considered ground 2 (that she erred in holding that the facts relied on provided sufficient grounds to grant a Chabra-type injunction against GNT) to have reasonable prospects of success.  The arguments in support of ground 2 made by Mr Paul Lam, SC[4] before the judge were apparently not advanced by the former counsel of GNT, nor were the authorities referred to by Mr Lam cited at the earlier hearing.

11.  Under section 14AA(3) of the High Court Ordinance, Cap 4, leave to appeal for an interlocutory appeal may be granted in respect of a particular issue arising out of the interlocutory judgment or order and it may be made subject to such conditions as the court hearing the leave application considers necessary in order to secure the just, expeditious and economical disposal of the appeal.  Having come to the view that ground 1 has no reasonable prospects of success, the judge should have granted leave to appeal only in respect of ground 2, instead of giving leave to appeal without imposing any restriction.

12.  GNT filed a notice of appeal advancing grounds 1 and 2.  XY filed a respondent’s notice seeking to support the Decision by relying on the Canadian Final Judgment and a supplementary respondent’s notice to contend that GNT should not be permitted to argue ground 1.

13.  The dispute whether GNT should be allowed to pursue ground 1 on appeal was resolved when Mr Victor Joffe[5] for XY eventually abandoned reliance on the Canadian Final Judgment, having accepted that one of the requirements for the enforcement of a foreign judgment in Hong Kong under the common law regime is not met.  Although the notice of claim in the Recovery Action was duly served on GNT in the BVI, it was not served on GNT within Canada.  As GNT chose not to appear in the Canadian proceedings and its application to set aside the Canadian Final Judgment was not taken on the merits, it has not submitted to the jurisdiction of the Canadian court.  Hence there was no competent in personam jurisdiction recognised in Hong Kong for the domestic enforcement of the Canadian Final Judgment under the common law regime.  XY would seek a Chabra-type injunction against GNT to aid enforcement against Jesse Zhu of the Monetary Judgment, which, unlike the Canadian Final Judgment, is not impeachable by any rules on conflict of laws (Decision, §§25 to 27).

14.  It is therefore unnecessary to consider ground 1.  Nor do we need to be concerned with XY’s belated application to adduce evidence on appeal to update the court on the status of GNT’s application to set aside the Canadian Final Judgment taken out more than a year ago.  Mr Joffe has not pursued that summons.

15.  Mr Lam took issue with Mr Joffe’s inclusion in his list of authorities of three judgments given by the Canadian courts in June and July 2016, being the judgment in the Topsires Action and two judgments of the Court of Appeal for British Columbia in the appeal brought by Jesse Zhu against the Contempt Judgment.  He contended that Mr Joffe referred to those cases not to illustrate any legal proposition but to rely on matters or findings of a factual nature mentioned in the paragraphs cited by Mr Joffe and a summons to adduce new evidence on appeal should be issued.  If such an application were taken out, he submitted it should be dismissed for lateness and because the new matters sought to be relied on are of marginal relevance and would have no significant impact on the appeal.

16.  Mr Lam’s contentions are misconceived.  GNT was not a party in any of the three judgments and is not bound by the findings of fact in those judgments.  As against GNT, the findings cannot be regarded as evidence of the truth of the findings.  The Contempt Judgment had been placed before the judge.  The two judgments of the Court of Appeal showed that Jesse Zhu’s appeal against the finding of contempt and sentence was dismissed and the circumstances of that dismissal.  They are not relied on as evidence of the truth of anything.  Similarly, the paragraphs relied on by Mr Joffe in the judgment of the Topsires Action would only show the view formed by the Canadian court on Ms Zhou’s evidence.  He would invite this court to take a similar view on like evidence given by Ms Zhou, but that is as far as it goes.  There is no need for an application to be taken out to adduce new evidence on appeal.

17.  Therefore the issue remaining is ground 2.

Ground 2 of the notice of appeal

18.  In the Decision, the judge made these pertinent findings:

“There were assets of Jesse Zhu within the jurisdiction of Hong Kong. There was also evidence before L Chan J (Lam-1^st [6], §§39‑51.) that GNT was held by nominees for Jesse Zhu. So GNT was joined under the Chabra jurisdiction of the court ...” (§28)

“It was not only a case of inference of dissipation of assets based on low commercial morality of Jesse Zhu but actual written evidence from Jesse Zhu showing his intention to spirit away his assets and instructing his subordinates (such as Ms Zhou) to do so, thereby rendering himself judgment proof. (See Lam-1^st, §§52-58.)

There was a good arguable case that the Monetary Judgment can be enforced in Hong Kong and, specifically, against GNT as an asset of Jesse Zhu. The HK Mareva mirrored the Canadian Mareva.” (§§30 and 31)

“There was evidence from Ms Zhou, James Yang and Kevin Xu (“the ex-employees”) who gave affirmations as to entities (including GNT) controlled/owned by Jesse Zhu. Their sworn evidence together with the emails between them and Jesse Zhu did not just show Jesse Zhu to be actively involved in the business of GNT because of its investment relationship with the IND group. There was evidence in the form of, for example, an email from Jesse Zhu to Ms Zhou to set up a bank account at the HSBC in order to receive substantial funds for GNT. The evidence reinforces a good arguable case that although Jesse Zhu has never been a director or shareholder of GNT, he controlled or owned GNT.” (§33)

“...the 1^st page of the bank statement of the HK Account was not given to the plaintiff until specific request made by the plaintiff’s solicitor. It was discovered that that 1^st page showed the address at Foster’s Way, being the address of Jesse Zhu and other entities like Jin Tang, Peter Wang, Fraser Biomedical Ltd, Newtech and Embryontech. Such evidence adds weight to the fact that there are other entities owned/controlled by Jesse Zhu, which he wants to hide.” (§34)

“On Ms Zhou’s evidence it is alleged that in around late 2012 or early 2013, Jesse Zhu had asked her to transfer money out of IND LifeTech Group Ltd to GNT’s account to “avoid execution by XY”. GNT claims that that was untrue because the money had in fact been transferred into GNT’s account as a legitimate payment made in accordance with the Take Private Transaction on 30 June 2011. ...

The source of payment into GNT’s account was irrelevant, in my view. What was relevant was Jesse Zhu’s power of disposal over it.” (§§46 and 49)

“Whether or not there had been actual transfer of Jesse Zhu’s assets to GNT was irrelevant and was not relied on by the plaintiff. What was relevant was the fact of Jesse Zhu giving the instructions in that email, evidencing his control/ownership over the assets and GNT.” (§52)

(Emphasis supplied)

19.  In gist, the arguments advanced before the judge in the leave application by Mr Lam in support of ground 2 and repeated by him in this court are as follows:

(1)   The findings in the Decision that Jesse Zhu was the sole beneficial owner of GNT and hence had control over its assets (even assuming them to be true) did not provide sufficient grounds to grant a Chabra-type injunction against GNT and the judge has blurred the distinction between control of GNT’s assets and the ownership of GNT’s assets.  There is also a distinction between the ownership of shares in a company and ownership of the assets in the company.

(2)   In the context of Chabra-type injunctions, it is not legitimate to disregard the separate corporate personality of individual companies in a group (i.e. to pierce the corporate veil), merely because the ultimate or intermediate holding company may have the practical ability to require a subsidiary to act in a particular way, or because it is necessary to achieve justice, even in circumstances where one or more of the companies in question may have been involved in some sort of impropriety.

(3)   The mere fact that the CAD has substantial control over the assets held by the NCAD is not enough.  The proper question is whether there is good reason to suppose that the assets of the NCAD (in this case, the HK Account) are “amenable to execution of a judgment obtained against the CAD” (Lakatamia Shipping Co Ltd v Su & Ors [2015] 1 WLR 291 at 306B, §32) or “susceptible to a procedure which would lead to satisfaction of a judgment” (Akai Holdings Ltd v Ho Wing On Christopher & Anr, HCMP 1718, 1720 & 1722/2009, 24 September 2009, §44).

(4)   The burden falls on XY to show a good arguable case that the HK Account is susceptible or amenable to execution of the Monetary Judgment in Hong Kong.

(5)   Even if Jesse Zhu is the beneficial owner of GNT and has power to dispose of GNT’s assets, these facts are insufficient to make GNT’s assets susceptible or amenable to execution of the Monetary Judgment in Hong Kong.  It is not enough that as the sole beneficial owner of GNT, Jesse Zhu could, if he chose, cause the assets held by GNT to be used to satisfy the judgment.  “It is necessary that the court be satisfied that there is good reason to suppose either (a) that the CAD can be compelled (through some process of enforcement) to cause the assets held by the NCAD to be used for that purpose; or (b) that there is some other process of enforcement by which the claimant can obtain recourse to the assets held by the NCAD.” (Algosaibi v Saad Investment Co Ltd 2011 (1) CILR 178 at §43, per Sir John Chadwick, sitting as President in the Court of Appeal of the Cayman Islands; this passage was cited with approval by Flaux J in Linsen International Ltd v Humpuss Sea Transport Pte Ltd [2011] 2 Lloyd’s Rep 663 at §150 and by Gloster J in Parbulk II AS v PT Humpuss Intermoda Transportasi TBK [2011] 2 CLC 988 at §58[7].)

20.  Mr Lam argued that the judge had not considered and applied the above principles, understandably as her attention had not been drawn to them or the relevant authorities.

21.  Mr Joffe submitted the Chabra jurisdiction is engaged with respect to GNT as the evidence shows overwhelmingly there is good reason to suppose that the funds in the HK Account are beneficially held by GNT for Jesse Zhu.  They are in truth assets of Jesse Zhu to which XY can have recourse for partial satisfaction of the Monetary Judgment.

22.  It must be borne in mind that “whether assets legally vested in a company are beneficially owned by its controller is a highly fact-specific issue”, per Lord Sumption JSC in Prest v Prest [2013] 2 AC 415 at §52, quoted in Lakatamia Shipping at §33.  And as Gloster J said in Parbulk II at §35:

“It is obvious that, in every case where a world-wide freezing order is sought against a third party or NCAD who is not a judgment debtor, or potential judgment debtor, the court has to look very carefully at the particular facts upon the basis of which it is being asked to exercise its jurisdiction and discretion to make such an order. Although one can articulate general principles that govern the approach, whether or not an order can, or should, be made will be necessarily heavily fact-dependent.”

23.  Mr Lam acknowledged that the appeal court will not interfere with the judge’s assessment of whether there is a good arguable case unless she was plainly wrong, quoting these passages in Kazakhstan Kagazy Plc v Arip [2014] 1 CLC 51:

“The judge has here made an evaluation of a mass of material and this court should not interfere with that evaluation unless it is obviously wrong or the judge has misdirected himself in some way. Commercial judges have great experience in assessing what is and is not a good arguable case ...” (§22, per Longmore LJ)

“... as Longmore LJ pointed out in Lakatamia Shipping Co Ltd v Nobu Su [2012] EWCA Civ 1195 §27, in a judgment which the Master of the Rolls and Sullivan LJ agreed, the Court of Appeal ought to respect the instincts of experienced commercial judges on the question whether there is a good arguable case and should only interfere if it is plain that the judge was wrong.” (§62, per Elias J)

The legal principles

24.  A convenient starting point is a summary of the Chabra jurisdiction taken from the judgment of Popplewell J in PJSC Vseukrainskyi Aktsionernyl Bank v Maksimov [2013] EWHC 422 (Comm) at §7 as approved by Tomlinson LJ in Lakatamia Shipping at §32:

“(1) The Chabra jurisdiction may be exercised where there is good reason to suppose that assets held in the name of a defendant against whom the claimant asserts no cause of action (the NCAD) would be amenable to some process, ultimately enforceable by the courts, by which the assets would be available to satisfy a judgment against a defendant whom the claimant asserts to be liable on his substantive claim (the CAD).

(2) The test of ‘good reason to suppose’ is to be equated with a good arguable case, that is to say one which is more than barely capable of serious argument, but yet not necessarily one which the judge believes to have a better than 50% chance of success.

(3) In such cases the jurisdiction will be exercised where it is just and convenient to do so. The jurisdiction is exceptional and should be exercised with caution, taking care that it should not operate oppressively to innocent third parties who are not substantive defendants and have not acted to frustrate the administration of justice.

(4) A common example of assets falling within the Chabra jurisdiction is where there is good reason to suppose that the assets in the name of the NCAD are in truth the assets of the CAD. Such assets will be treated as in truth the assets of the CAD if they are held as nominee or trustee for the CAD as the ultimate beneficial owner.

(5)   Substantial control by the CAD over the assets in the name of the NCAD is often a relevant consideration, but substantial control is not the test for the existence and exercise of the Chabra jurisdiction. Establishing such substantial control will not necessarily justify the freezing of the assets in the hands of the NCAD. Substantial control may be relevant in two ways. First, evidence that the CAD exercises substantial control over the assets may be evidence from which the court will infer that the assets are held as nominee or trustee for the NCAD as the ultimate beneficial owner. Secondly, such evidence may establish that there is a real risk of dissipation of the assets in the absence of a freezing order, which the claimant will have to establish in order for it to be just and convenient to make the order. But the establishment of substantial control over the assets by the CAD will not necessarily be sufficient: a parent company may exercise substantial control over a wholly owned subsidiary, but the principles of separate corporate personality require the assets to be treated as those of the subsidiary not the parent. The ultimate test is always whether there is good reason to suppose that the assets would be amenable to execution of a judgment obtained against the CAD.”

25.  It is pertinent to note that in proposition (4), it was stated that a common example of assets falling within the Chabra jurisdiction is where there is good reason to suppose that the assets in the name of the NCAD are in truth the assets of the CAD.  As pointed out by Gloster J in Parbulk II at §46, it is clear that the English court does not regard the Chabra-type jurisdiction as limited to cases where the NCAD holds, or has received, assets beneficially belonging to the CAD or assets in which the CAD has some sort of proprietary entitlement.  In this respect, the English court decisions followed the important decision of the High Court of Australia in Paul Cardile v LED Building Proprietary Ltd (1999) 198 CLR 380.  At §§57 and 58 of the joint judgment of Gaudron, McHugh, Gummow and Callinan JJA, the High Court of Australia stated:

“What then is the principle to guide the courts in determining whether to grant Mareva relief in a case such as the present where the activities of third parties are the object sought to be restrained? In our opinion such an order may, and we emphasise the word “may”, be appropriate, assuming the existence of other relevant criteria and discretionary factors, in circumstances in which:

(i)   the third party holds, is using, or has exercised or is exercising a power of disposition over, or is otherwise in possession of, assets, including “claims and expectancies”, of the judgment debtor or potential judgment debtor; or

(ii)   some process, ultimately enforceable by the courts, is or may be available to the judgment creditor as a consequence of a judgment against that actual or potential judgment debtor, pursuant to which, whether by appointment of a liquidator, trustee in bankruptcy, receiver or otherwise, the third party may be obliged to disgorge property or otherwise contribute to the funds or property of the judgment debtor to help satisfy the judgment against the judgment debtor.

It is that principle which we would apply to this case. Its application is a matter of law, although discretionary elements are involved.”

26.  It is recognized that the second limb of the principle set out in §57(ii) is “potentially of extremely wide application.”  As stated by Briggs Jin Revenue & Customs Commissioners v Egleton [2007] 1 All ER 606 at §29, “it appears to contemplate that jurisdiction exists to make a freezing order against any potential debtor of an individual or company against whom the claimant has a cause of action, upon the footing that since enforcement of a judgment against the defendant may lead to its liquidation or (if an individual) bankruptcy, and since a liquidator or trustee in bankruptcy may then be able to pursue claims against third parties, then jurisdiction exists to enable the plaintiff to seek a freezing order against any such third parties, always assuming that the other discretionary considerations, such as a risk of dissipation of assets, are satisfied.”

27.  Mr Joffe made clear that in this instance, XY is not relying on the second limb of the principle in the judgment of the High Court of Australia.  So it is not necessary to say anything further about this limb.  We are here concerned if a good arguable case is made out on the first limb.

The case of XY

28.  It is the evidence of Ms Zhou that she was involved in organising the corporate affairs of Jesse Zhu’s offshore companies, including GNT, and Jesse Zhu exercised ultimate authority and total control over these companies through nominee directors, who, together with the registered shareholders, were typically his relatives and/or employees in the IND Group.  Mr Lam does not seek to disturb the judge’s finding of a good arguable case that GNT was an asset of Jesse Zhu (at §31 of the Decision) and that Jesse Zhu controlled or owned GNT (at §33 of the Decision).  Mr Joffe stressed that it was conceded by Mr Lam the evidence adduced by XY shows that Jesse Zhu was in control of the HK Account and was operating it, and he was free to use the monies in the account as he wished.

29.  Mr Joffe submitted that looked at in the round, there is overwhelming evidence there is good reason to suppose that the funds in the HK Account are beneficially held by GNT for Jesse Zhu, as well as a real risk of dissipation in the absence of the injunction.  He summarised the pertinent evidence as follows:

(1)   It is Ms Zhou’s evidence that Jesse Zhu was at all material times the beneficial owner of the assets of GNT[8].

(2)   In January 2009, Peter Wang (as the sole shareholder of GNT) executed a power of attorney prepared by Ms Zhou that authorised Ms Wang Shuli (his sister and Jesse Zhu’s wife) to handle all matters relating to GNT, including “the shares and shareholder issues”[9].

(3)   Following the appointment of Ms Li Hui Ping and Ms Zhu Qian as directors of GNT, on Jesse Zhu’s instructions, in around April 2009, Ms Zhou prepared and sent to Ms Li and Ms Zhu for signing, a set of written resolutions of the directors of GNT, resolving (a) to open the HK Account to be operated by Jesse Zhu signing singly; and (b) to authorise Jesse Zhu to sign such documents and “to do such act and things in relation to the opening of bank account”[10].

(4)   On the instructions of Jesse Zhu, Ms Zhou organised the opening of a Renminbi Trade Settlement Saving Account for GNT in February 2012 (as an additional facility under the HK Account that was first opened in 2009) by preparing the necessary directors’ resolutions and arranging for the signing of the account opening documents by Ms Li and Ms Zhu[11].

(5)   While Ms Zhou was employed by the IND Group, she operated the HK Account (in GNT’s name) on the instructions of Jesse Zhu using a USB “security fob” passed to her by Jesse Zhu that gave her access to the HK Account[12].  Ms Zhou confirmed none of the directors – Peter Wang, Ms Zhu, Ms Li – ever provided instructions about the operation or handling of the bank account of GNT, they simply signed documents from time to time according to Jesse Zhu’s instructions[13].

(6)   On 3 March 2012, the day after the Monetary Judgment was handed down, Jesse Zhu sent Ms Zhou an email (“the Execution Avoidance Email”) in which he instructed her, inter alia, to arrange for all his overseas assets to be transferred to GNT and two other companies[14].

(7)   Ms Zhou was responsible for executing the plan to arrange Jesse Zhu’s assets in order to avoid execution of the Monetary Judgment pursuant to instructions given in the Execution Avoidance Email[15].

(8)   In April 2012, Jesse Zhu instructed Ms Zhou to set out for him the names of the offshore companies controlled by him and the location of their minute books in preparation of moving the minute books to the PRC to avoid the disclosure of information to XY that might assist it in executing the Monetary Judgment.  Ms Zhou compiled a table of nine of Jesse Zhu’s offshore companies, including GNT[16].

(9)   In around late 2012 or early 2013, Jesse Zhu asked Ms Zhou to transfer a sum of money from an account in Hong Kong in the name of IND Lifetech Group Ltd (“ILG”; a company in the IND Group) into the HK Account that he regarded as his money based on discussions she had with him.  The reason for the transfer to the HK Account was because Jesse Zhu wanted the money in an account that had no obvious connection with him, to avoid execution by XY[17].

(10)   On or about 2 April 2013, Jesse Zhu caused funds in the HK Account to be used for the payment of C$30,000 to Ms Zhou’s husband in reimbursement of legal fees incurred by Ms Zhou in her appeal against the Monetary Judgment[18].

(11)   The address of GNT shown on the first page of the statement for the HK Account dated 17 April 2014, which was not disclosed to XY’s solicitors until a specific request was made for it, was the IND Office Building at 1629 Foster’s Way, Delta, British Columbia, being the business address of Jesse Zhu, Peter Wang, and some of the other defendants in the Topsires Action[19].

(12)   In the Contempt Judgment at §§139 to 142, Kelleher J inferred from the Execution Avoidance Email and other facts that Jesse Zhu had the ability to make some payment towards the judgment debt in the Monetary Judgment and found Jesse Zhu guilty of contempt for non-payment of the same.  Kelleher J sentenced him to six months imprisonment for this and a further finding of contempt for breach of orders for delivery up and prohibiting the use of XY’s confidential information.

(13)   Jesse Chu did not answer to his committal for contempt.  He absented himself from the jurisdiction of the Canadian courts and his appeals against the Contempt Judgment and the sentence have been dismissed by the Court of Appeal for British Columbia for his failure to appear.

30.  As for the allegation of Ms Wang Zhaoyan that the funds in the HK Account represented part of the proceeds of the repurchase of shares in IND DairyTech Ltd (“IND DairyTech”) held by GNT[20], Ms Zhou has denied this and deposed as follows.  GNT was formed by Jesse Zhu in 2000 when he first tried to take a number of Canadian companies public and GNT remained dormant after the IPO failed.  In 2007, they learned of a method of reverse takeover for going public and Jesse Zhu instructed her to reactivate GNT to support the IPO for IND DairyTech.  They distributed shares of ILG among Jesse Zhu’s other companies, ostensibly unrelated entities such as GNT, and including GNT, to make it appear that there were other investors (such as Peter Wang) in the IPO, and that appearance was false[21].

The submissions of GNT

31.  Mr Lam pointed to other evidence to support his contention that the available evidence is plainly insufficient to support a good arguable case that GNT was holding the monies in the HK Account on trust or as nominee for Jesse Zhu.

32.  Firstly, GNT was incorporated long before the disputes between Jesse Zhu and XY arose.

33.  Secondly and importantly, Ms Wang has deposed that the monies in the HK Account were the sale proceeds of the repurchase of shares[22].  In support of this, she referred to the IPO documents in respect of IND DairyTech and the documents relating to the subsequent Take Private Transaction.

34.  IND DairyTech is a Cayman Island company which used to be publicly listed in the TSX Venture Exchange in Canada.  At the material times, Jesse Zhu was its Chairman and Chief Executive Officer and Ms Zhou its Vice President (Operations) and Corporate Secretary.  According to the Filing Statement for the IPO of IND DairyTech, it was stated that as at 29 November 2008, Peter Wang beneficially owned GNT.  It was recorded that GNT had a shareholding of 8.6% in ILG.

35.  According to Ms Wang’s understanding, GNT’s shareholding in ILG was transferred to IND DairyTech in December 2008 and GNT became a shareholder of IND DairyTech.  On 30 June 2011, IND DairyTech announced that the Take Private Transaction was proposed and on its completion IND DairyTech would apply to have its common shares de-listed from the exchange in Canada.  As part of the Take Private Transaction, IND DairyTech repurchased all the 4.280999 common shares held by GNT.  The cash consideration, which was expected not to exceed RMB 7,107,587 per common share, was paid into the HK Account in about December 2012.  The remaining balance in the HK Account represented part of such sale proceeds.

36.  Ms Wang asserted that Jesse Zhu has never had any interest in any of GNT’s shareholding in ILG and IND DairyTech and there is no basis to suggest that the assets in the HK Account ever belonged to Jesse Zhu or were transferred from Jesse Zhu.

37.  As to the evidence relied on by Mr Joffe summarized above, Mr Lam made these criticisms:

(1)   Ms Zhou’s statement that Jesse Zhu was at all material times the beneficial owner of the assets of GNT must be read in context.  In her statement, she did not draw any distinction between GNT’s shares and assets.  Also, she has not explained why she said Jesse Zhu was the owner of GNT’s assets.

(2)   The evidence that the HK Account was opened and operated under the control of Jesse Zhu does not, without more, support an inference, let alone a good arguable case, of ownership of the funds in this account.

(3)   As for the Execution Avoidance Email, in the court below, XY did not rely on any actual transfer of Jesse Zhu’s assets to GNT, as noted by the judge in §52 of the Decision.

(4)   Ms Zhou’s assertion that the funds in the HK Account are Jesse Zhu’s assets is lacking in particulars and unsupported by documents. In contrast, Ms Wang’s evidence that the monies in the HK Account were the sale proceeds of the repurchase of shares by ILG was supported by the IPO documents and the documents relating to the Take Private Transaction, and relevant documents concerning the repurchase of shares have been produced, such as the repurchase agreement that was signed.

(5)   The address of GNT shown on the statement for the HK Account was not just the business address of Jesse Zhu but was the address for other entities too, including Peter Wang.  On GNT’s case, Peter Wang was the beneficial owner of GNT.

(6)   The inference drawn by Kelleher J in the Contempt Judgment was only that Jesse Zhu had the ability to make some payment toward the judgment debt.  There is no evidence that any of Jesse Zhu’s personal assets had been transferred to GNT, not to mention that a finding in a case where GNT was not a party cannot assist in showing that GNT’s assets were Jesse Zhu’s personal assets.

(7)   Similarly, the finding of contempt against Jesse Zhu cannot assist in showing that GNT’s assets were Jesse Zhu’s personal assets.

(8)   XY has relied on guilt by association that GNT is owned and controlled by Jesse Zhu, who is characterised as a “serial fraudster”, in support of its contention that GNT is not to be treated as an innocent party.  Simply because GNT has become mixed up in Jesse Zhu’s attempts to make himself judgment-proof does not make GNT’s assets “available” to satisfy the judgment debts of Jesse Zhu under the Chabra jurisdiction (Algosaibi, §33).

38.  Taking all the evidence relied on by XY, Mr Lam submitted that at best, it only supports a good arguable case that Jesse Zhu is the owner and controller of GNT.  He reiterated that a distinction must be drawn between the ownership of shares in a company and the ownership of assets in a company.  Something more than control must be shown for an inference to be drawn that the assets in a company are held as nominee or trustee for the beneficial owner of the company.  He emphasised that the relevant test for “availability” for the purpose of the Chabra jurisdiction is not whether there was good reason to suppose that the CAD exercises “substantive” control over the assets in the possession of the NCAD, as distinct from “legally enforceable” control.  The fact that the CAD has substantial control over assets held by the NCAD is likely to be of critical importance whether there is real risk of dissipation of assets, but that, of itself, is not enough to found jurisdiction.  This brings us back to the statement of Sir John Chadwick quoted earlier: “It is necessary that the court be satisfied that there is good reason to suppose either (a) that the CAD can be compelled (through some process of enforcement) to cause the assets held by the NCAD to be used for that purpose; or (b) that there is some other process of enforcement by which the claimant can obtain recourse to the assets held by the NCAD.”  “It is necessary to identify some process of enforcement which would (or might) lead to the assets of the NCAD becoming available to satisfy the judgment which the claimant may obtain against the CAD.” (Algosaibi, §§33, 38 to 43, 46)

Analysis and decision

39.  XY’s case for a Chabra-type injunction against GNT is based not on the second limb formulated by the High Court of Australia in Cardile but on the first limb. XY’s contention is that the funds in the HK Account are in truth the assets of Jesse Zhu so XY can have recourse to these assets for partial satisfaction of the Monetary Judgment.

40.  Mr Lam pointed to §44 of the Notice of Civil Claim in the Recovery Action in Canada filed by XY, in which it was asserted that it was “agreed” between Jesse Zhu and GNT, and that both parties intended, that GNT would hold all its assets as a bare trustee for Jesse Zhu and Jesse Zhu was entitled to have the legal ownership of the assets conveyed to him at any time.  He submitted that this allegation of express trust by agreement is a bare assertion wholly lacking in particulars.  Further, in the evidence filed in support of the applications for the Canadian Mareva and the HK Mareva, there is no mention of any such agreement.

41.  I do not think it matters that no express trust by agreement is relied on for the purpose of the present application, so long as there is a good arguable case that GNT holds the funds in the HK Account as a nominee for Jesse Zhu.  This may be established as a matter of inference.

42.  XY’s case rests primarily on the evidence of Ms Zhou and the documents provided by her.  The judge has considered GNT’s allegation that Ms Zhou had a strong motive to implicate GNT to reduce her own liability to XY and her evidence should be viewed with suspicion.  As the judge has noted, this is an argument that had been raised by Jesse Zhu in the contempt proceedings in Canada and was rejected after a full trial with oral evidence[23].  The judge could discern no basis to form a view different from that of the Canadian court[24].  I am inclined to agree.  The judge also examined the evidence before her independently[25].  She was entitled to give such weight to Ms Zhou’s evidence as she saw fit, including the clear statement from Ms Zhou that Jesse Zhu was at all material times the beneficial owner of the assets of GNT.

43.  Mr Joffe has summarised the salient points in Ms Zhou’s evidence.  In assessing her evidence, the combined effect of the salient points must be borne in mind.  Taking into account the totality of her evidence, and bearing in mind that a good arguable case for this purpose is “one which is more than barely capable of serious argument, but yet not necessarily one which the judge believes to have a better than 50% chance of success”, in my view there is sufficient evidence from which an inference may be drawn to support a good arguable case that the funds in the HK Account belonged beneficially to Jesse Zhu.

44.  It is highly significant that Jesse Zhu was in control of the HK Account, that he was operating it, and was free to use the monies as he wished.  In contrast, the directors of GNT had no access to the HK Account and had never provided instructions about the operation or handling of the bank account opened in the name of GNT.

45.  The Execution Avoidance Email is another significant piece of evidence, showing that the assets of Jesse Zhu were to be transferred to GNT for the purpose of avoiding execution of his judgment debts. I do not think it material that XY was unable to adduce evidence that assets were actually transferred to GNT pursuant to the instructions in this email and so did not rely on actual transfer for present purpose.

46.  Ms Wang asserted that the funds in the HK Account were proceeds of the repurchase by IND DairyTech of GNT’s shares in IND DairyTech and that GNT was beneficially owned by Peter Wang.  She has not adduced material evidence (such as bank statements, company accounts, vouchers and the like) to back up her assertion that the funds in the account came from the proceeds of the repurchase of shares, when she would be in a position to provide such evidence.  Other than the fact that there was a substantial sum of $38 million odd in the HK Account when the HK Mareva was continued on 17 April 2014, no information was provided as to when and in what amount or amounts this substantial sum came to be deposited in the account.  The court would expect to see a paper trail for the transfer or transfers of $38 million odd into the HK Account.  There was none.

47.  Even if the funds in the HK Account were proceeds of the repurchase of shares by IND DairyTech, this does not necessarily mean that the funds are the assets of GNT.  Ms Zhou’s evidence is to the effect that Jesse Zhu had given away shares to ostensibly unrelated entities, including GNT, to create a false appearance there were other investors in the IPO.  That being the case, if her evidence is accepted, GNT would, at least arguably, hold the shares transferred to it gratuitously for the purpose of giving a false appearance on a resulting trust for Jesse Zhu (Prest v Prest at §49), and likewise the proceeds derived from the repurchase of shares held by GNT would be held beneficially for Jesse Zhu.

48.  The judge had little regard to Ms Wang’s assertion that GNT and its assets were never owned by Jesse Zhu[26].  The judge is fully entitled to do so, in view of the unsatisfactory nature of Ms Wang’s affirmation, that she had not mentioned the specific source or sources of her knowledge and belief when she deposed to matters well before she became a shareholder of GNT in September 2014 and a director in January 2015.  Her subsequent explanation of how she became a director and 50% shareholder in GNT because of “internal arrangement” of Peter Wang’s family and her family (which she called the Wang clan in Qingdao), the details of which are “private and confidential” and which she cannot disclose[27], does not have the ring of truth about it.  Peter Wang had passed away in January 2014, before his wife transferred her shares in GNT to Ms Wang, and before her appointment as a director a few months after that.

49.  For all the above reasons, I am of the view a good arguable case is made out for an appropriate inference to be drawn that the funds in the HK Account are held beneficially for Jesse Zhu and there is sufficient basis, along with other discretionary considerations which the judge had taken into account, for the Chabra jurisdiction to be engaged.

50.  I would dismiss the appeal of GNT.

Costs

51.  We have heard arguments on costs.  There is no dispute that costs should follow the event.  I would order GNT to pay the costs of XY in this appeal, with a certificate for two counsel.

Hon G Lam J:

52.  I agree.