JUNESTAR INVESTMENT CORPORATION v. BOLDWIN CONSTRUCTION CO LTD AND ANOTHER

HCA 1036/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1036 OF 2002

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(by Counterclaim)

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D E C I S I O N

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1. I have before me a summons taken out on 21 March 2003 by the plaintiff by the original action, Junestar Investment Corporation ("Junestar"), for an order that the 2nd Defendant by the original action, Chan Shiu Chick ("Dr Chan") be cross-examined on his 1st, 2nd, 4th and 5th affirmations filed in these proceedings.

2. The background giving rise to this application may be set out as follows.

3. In March 2002, Junestar brought this derivative action as a shareholder of Boldwin Construction Company Ltd ("Boldwin"), for the benefit of Boldwin and all its shareholders. Madam Law Wai Duen Nina ("Madam Law") is the only registered shareholder of Junestar. She is married to Dr Chan. There are pending matrimonial proceedings between them in HCMC No. 3 of 2002. In the derivative action, Junestar seeks damages against Dr Chan for breach of fiduciary duty owed by him as a director to Boldwin, together with various declarations, injunctions and other reliefs. The net proprietary claims of Junestar against Dr Chan are in the region of HK$45 million.

4. On 3 June 2002, Junestar issued a summons for a worldwide Mareva injunction against Dr Chan. The hearing took place in July and August 2002. On 31 October 2002, I made an order for a worldwide Mareva injunction against Dr Chan restraining him from disposing of assets up to the value of HK$45 million odd. The injunction contained the usual exceptions providing for ordinary living expenses and legal expenses. For the former, a limit of HK$80,000 per week was imposed; for the latter, it was "any sums on legal advice and representation".

5. In opposing the application for the Mareva injunction, Dr Chan made his 1st affirmation on 4 July 2002 and his 2nd affirmation on 24 July 2002. In the 1st affirmation, he deposed that his financial position remained more or less the same as that disclosed in his affirmation of means in the matrimonial proceedings filed on 31 August 2001. In his 2nd affirmation, he gave an account of the movements in his assets since he filed his affirmation of means.

6. Two months after the Mareva injunction was granted and on 12 December 2002, Junestar became aware of Dr Chan's instructions to Prudential Bache ("Prudential") to transfer US$300,000.00 to his account at the Bank of China ("BOC") for the purpose of applying the same for his living and legal expenses. Junestar requested Dr Chan to give an explanation for this transfer as it would appear from his 2nd affirmation that as in July 2002, Dr Chan had maintained a sum of HK$33 million odd as term deposits at BOC and should have sufficient funds in his account at BOC to pay for his living and legal expenses without a transfer of funds.

7. About a month after the request for explanation, Dr Chan by his solicitors wrote to Junestar's solicitors on 20 January 2003 supplying two bank statements and stating that as at 17 January 2003, the total deposits held at BOC were HK$600,000.00 odd. This naturally elicited an enquiry from Junestar's solicitors sent on 21 January 2003 for an explanation why HK$33 million was missing from Dr Chan's account at BOC.

8. As Junestar was not satisfied with the answers provided by Dr Chan in correspondence, Junestar issued a summons on 7 February 2003 for disclosure of assets on affidavit. An order in terms of the summons ("the disclosure order") was made by consent on 12 February 2003 as follows:

Dr Chan must inform Junestar in writing within 3 days from the date thereof:

(a) all his assets of an individual value of HK$50,000.00 or more whether in or outside Hong Kong, whether in his own name or not, and whether solely or jointly owned, giving the value, location and details of all such assets;

(b) full details concerning the HK$33 million which has since been removed from Dr Chan's accounts maintained at BOC, in particular when, how and for what purposes such sum was disposed of or dealt with together with all supporting documents (including but not limited to all term deposits and withdrawal instructions given to BOC); and

(c) the above information must be confirmed in writing in an affirmation which must be served on the solicitors of Junestar within 7 days after the date thereof.

9. Dr Chan claims it was only to avoid unnecessary costs that he had consented to the disclosure order, as there is no question that Madam Law is in fact already familiar with the details of his assets in the matrimonial proceedings. Apart from his affirmation of means in August 2001, Dr Chan had provided answers to Madam Law's questionnaire in the matrimonial proceedings on 11 October 2002 and on 6 December 2002, he filed a supplemental affirmation of means with yet more information on his finances.

10. Pursuant to the disclosure order, Dr Chan made his 4th affirmation on 17 February 2003, in which he provided a list of his assets, showing their current value with a total of approximately HK$52 million and disclosing copies of up-to-date bank statements and statements of his accounts with securities companies. In paragraph 16, he stated that he has not set out in detail his shares, interest and claims in 16 private companies as the same have been provided in his answers to the questionnaire dated 7 August 2002 of Madam Law in the matrimonial proceedings and in his various affirmations filed therein. He also set out in a table the particulars of payments totalling over HK$33.3 million from his account at BOC from 22 July 2002 to 21 Jan 2003.

11. Junestar took the view that the 4th affirmation is deficient and not in full compliance with the disclosure order and requested further disclosure by the letter of its solicitors dated 20 February 2003. In response to this, Dr Chan filed his 5th affirmation on 26 February 2003 in which he provided documents relating to his investment in Supreme Century Group Ltd ("Supreme Century") of US$3.75 million, equivalent to about HK$29.5 million. As for the other assets held by him for which he sought to refer to his answers to the questionnaire in the matrimonial proceedings, he summarised the contents of the 28 annexures to his answers instead of re-annexing them to his 5th affirmation "in order to save space". He provided documents relating to an interest-free loan of HK$30 million in July 2002 from a friend. The identity of this friend was not given in the affirmation but disclosed by Dr Chan in a separate letter of his solicitors dated 26 February 2003, to avoid unnecessary embarrassment to this friend.

12. On 21 March 2003, Junestar issued the present summons to cross-examine Dr Chan on his four affirmations on the basis that he has not fully complied with the disclosure order and it would be in the interest of justice to order him to attend for cross-examination so as to enable Junestar to ascertain with greater particularity the whereabouts and existence of his assets.

13. It is not in dispute that the court has jurisdiction to make an order for cross-examination of a defendant on an affirmation made pursuant to an order for disclosure in aid of a Mareva injunction (House of Spring Gardens Ltd v. Waite [1985] FSR 173; Yau Chiu Wah v. Gold Chief Investment Limited [2002] 1 HKC 383). In addition to the Mareva jurisdiction, the court may also order cross-examination of the deponent of an affirmation under Order 38 rule 2 of the Rules of the High Court.

14. The principles in the exercise of this jurisdiction have been set out comprehensively by Ma J (as he then was) in Yau Chiu Wah. The purpose of the cross-examination in this situation is to enable a Mareva injunction to be made more effective, to obtain more information as to a defendant's assets and the whereabouts of such assets in circumstances where the court has already formed the view that there exists a risk of dissipation (Yau Chiu Wah at 389E to G and 391H to I).

15. It is accepted by Mr Coleman, who appeared for Junestar, that orders for pre-judgment cross-examination are rare, for the reasons set out in Yau Chiu Wah at 389G to 390B. This is an exceptional measure and a strong step often difficult to justify (Mareva Injunctions and Anton Piller Relief by Steven Gee QC, 4th edition, p. 354).

16. In exercising the discretion whether to order cross-examination, the court undertakes a balancing exercise. The question for the court is this: would the making of an order result in justice being achieved; conversely if an order were not made, would there be justice? (Yau Chiu Wah at 390F to H).

17. It was submitted by Mr Coleman that the present case is appropriate for an order for cross-examination, as the court can infer that Dr Chan is determined to conceal the true nature and extent of his assets from the court, and an immediate order for cross-examination is the only just and convenient way of ensuring that Dr Chan would not deal with his assets so as to deprive Junestar in future of the fruits of any judgment.

18. I do not think I should draw the inference of deliberate concealment of assets unless the disclosure made by Dr Chan is inadequate in material respects, or there are good grounds for believing that there are untruths in the affirmations made by him. I should also not lose sight that the purpose of ordering an immediate cross-examination is to enable further assets that have not been disclosed to be identified and preserved.

19. The complaints of Junestar may be grouped under the following heads.

(1) The 16 private companies

20. The complaint here is that there was and still is no proper disclosure of the "shares, interest and claims" Dr Chan has in these 16 private companies mentioned in paragraph 16 of his 4th affirmation and no disclosure of the assets held in the names of these 16 companies.

21. In his 4th affirmation, Dr Chan has referred to his answers to Madam Law's questionnaire in the matrimonial proceedings to say that the information he should provide is already there. In his 5th affirmation, he has referred to the 28 annexures to his answers, presumably as providing further information in this respect.

22. The answers to the questionnaire in the matrimonial proceedings are un-sworn, so that is not in compliance with the disclosure order. Further, although Dr Chan has applied to the Family Court for leave to "produce, use and/or inspect copies of documents filed in the matrimonial proceedings for the purposes of saving time and costs in complying with the disclosure order", leave was granted by Hartmann J on 12 May 2003 only to allow "an inspection of the annexures" to Dr Chan's answers, not in respect of the other documents filed in the matrimonial proceedings such as the affirmations, as the Judge is apparently concerned that the affirmations may contain matters of a private nature relevant only to the matrimonial proceedings and should not be raised in the public arena in the High Court Action . I have not seen the 28 annexures which the Family Court has allowed to be inspected. Insofar as some of the information is contained only in the answers or affirmations but not in the annexures, it would appear that Dr Chan has not made disclosure in the present proceedings in compliance with the disclosure order.

23. But is this a deliberate concealment of assets? I am not prepared to draw the inference that this is the case, having regard to the disclosure already given in the matrimonial proceedings (I understand seven box files containing affirmations, exhibits and annexures were produced by Dr Chan on his financial position); Dr Chan's application to the Family Court to produce and use the documents filed in the matrimonial proceedings (which was granted only in part); and the fact that of the 16 companies, a number of them are jointly owned by Dr Chan and Madam Law who would have equal access to the documents of these companies.

24. As to the complaint that the annexures are not up-to-date, I do not think this is a wholly justified complaint, as Dr Chan has produced in his 5th affirmation the up-to-date statements of his accounts at Prudential, BOC, and statements of his investments through Silver Cumulus Holdings Ltd, which are some of the annexures to his answers in the matrimonial proceedings.

25. In the special circumstances here, I do not think inadequate disclosure in respect of the 16 companies in these proceedings would justify an order for cross-examination. I will come back to the question as to what order I should make insofar as the disclosure order has not been fully complied with.

(2) The investment in Supreme Century

26. Junestar's allegation here is that there is contradiction between the subsequent affirmations which stated that Dr Chan is still holding this investment and his 2nd affirmation. Junestar's understanding of the 2nd affirmation is that the US$3.75 million previously invested in Singapore had been returned to Hong Kong and included in Dr Chan's deposits at BOC. What Dr Chan had said in his 2nd affirmation is that "the equivalent amount" in HK dollars had been returned, he did not say he had withdrawn or realized his investment and as explained in his subsequent affirmations, owing to the mistaken advice he received in July 2002, he had caused an amount equivalent to his investment to be returned to Hong Kong and he had to borrow HK$30 million from his friend for this purpose.

27. As for the complaint that there was insufficient information disclosed by Dr Chan as to Supreme Century, this was an investment made in May 2002, before Junestar had issued the summons for the Mareva injunction. Whether it is wise or prudent for Dr Chan to make this investment is not what I am concerned with. I am not persuaded that cross-examination would have helped to identify further assets that have not been disclosed.

(3) The payments of HK$33 million

28. Of the payments of HK$33 million from Dr Chan's account at BOC, HK$30 million was for repayment of the loan made to Dr Chan by his friend in July 2002. I do not think there are good grounds for believing that the explanation and documents provided by Dr Chan in respect of this loan might not be true or that the loan might not be a legitimate one. I am not prepared to draw the inference that the repayments made on 2 and 4 October 2002 were with the intention to avoid the consequence of a Mareva injunction about to be made. I note that Junestar's solicitors have also sought and received explanation from the lender.

(4) Deficiencies in the 2nd affirmation

29. The complaint here is that in the 2nd affirmation which was affirmed on 25 July 2002, Dr Chan has not mentioned the loan agreement that he had made with his friend only two days earlier of the loan of HK$30 million. Dr Chan should have been more forthcoming in this respect, instead of merely saying in his 2nd affirmation that an equivalent amount in HK dollars had been returned. This omission is not sufficient for me to draw the inference that there is deliberate concealment of assets.

30. For the above reasons, and as I am not satisfied a case of deliberate concealment of assets is made out, I am not minded to order cross-examination of Dr Chan on his affirmations. I am not persuaded that justice would be served in making this exceptional order in the present circumstances. This brings me to the question of what alternative order the court should make insofar as the disclosure order has not been fully complied with. As I have mentioned to the parties, I do not think it right to dismiss the application for cross-examination and send them away without making any order to remedy the situation.

31. Dr Chan has not complied with the disclosure order in respect of his interests in the 16 private companies. Mr Grossman, SC has submitted on his behalf that it would be a sterile and empty exercise to require him to disclose his interests in these companies in the High Court Action, as these companies are the subject of litigation between Dr Chan and Madam Law in other proceedings and that would simply be duplicating work already done elsewhere. Nevertheless, a court order must be obeyed.

32. I order Dr Chan to comply with paragraph 1(a) of the disclosure order by filing an affirmation disclosing his shares and interests in the 16 private companies mentioned in paragraph 16 of his 4th affirmation and his assets held in the names of these companies. This order is to be complied with within 14 days from today.

33. Mr Grossman has asked for the costs of this application on the basis that he has successfully opposed the order for cross-examination. As for the non-compliance of the disclosure order, he submitted that Dr Chan's non-compliance is merely technical and that Junestar has not been prejudiced in this respect. On the part of Junestar, Mr Coleman has sought costs on the basis that even though he has not been successful in his application for an order to cross-examine, the court has found non-compliance on the part of Dr Chan of the disclosure order. Mr Coleman submitted that it is not a technical non-compliance.

34. The difficulty I have here is that I do not know the extent of the material that has not already been disclosed in the matrimonial proceedings and I cannot really form a view whether the non-compliance with the disclosure order is a technical one.

35. In the circumstances, I am not minded to make an order for costs in favour of either party in any event. I order the costs of this application to be costs in the cause of the proceedings.