EMAGIST ENTERTAINMENT LTD v. NETHER GAMES (HONG KONG) LTD AND OTHERS

HCA 1659/2012

[2020] HKCFI 638

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1659 OF 2012

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(By Original Action)

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(By Counterclaim dated 3^rd May 2013 as amended on 14^th July 2015)

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(By Amended Counterclaim dated 14^th July 2015)

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REASONS FOR DECISION

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Introduction and Applicable Principles

1.  On 2 January 2013, upon the application of the plaintiff (by original action), Deputy High Court Judge Woo granted interlocutory injunctions and delivery up orders (the “Injunction Order”), against the 1^st to 6^th defendants (by original action).  The plaintiff gave the usual cross-undertaking as to damages as well as, inter alia, the following undertakings as recorded in Annexure II to the Injunction Order:

“(2) The Plaintiff will on or before 3 January 2013 establish a fixed deposit for three months in the sum of US$2,950,000.00 with a licenced bank in Hong Kong and maintain the same to be renewed every three months.

  (3)   The Plaintiff will cause an affidavit/affirmation to be sworn and filed confirming the placing of such fixed deposit as fortification for the compensation mentioned in paragraph (2) above in favour of the Defendants and such fixed deposit shall not be disposed of until any further Order.”

2.  By a Summons dated 2 February 2018, the plaintiff applied for leave pursuant to paragraph (3) of Annexure II “… to release and/or dispose US$470,000.00 out of the US$2,950,000.00 fixed deposit described under paragraph (2) of the Annexure II …” (the “Fixed Deposit”).  The substantive hearing of the Summons came before me, and after hearing the parties, I dismissed the Summons with brief oral reasons.  I indicated that I would give more detailed reasons in writing in due course, which I now do.

3.  The background of the matter and the basis of the Injunction Order are set out in the detailed Reasons for Decision of the deputy judge (the “Injunction Decision”) (reported in [2013] 1 HKLRD 898).  I do not intend to repeat them here and this judgment should therefore be read in conjunction with that decision.  Further, for the remainder of this judgment, save where otherwise indicated, I respectfully adopt the abbreviations and acronyms used in the Injunction Decision. 

4.  I should mention at the outset that Emagist HK’s reason for seeking to release US$470,000 from the Fixed Deposit is to use the sum for paying its future legal costs in this action up to, and including trial, and it is willing to give an undertaking to that effect.

5.  The principles for fortification of a cross-undertaking in damages are well established.  A defendant seeking further fortification “… will usually be required to show a change in circumstances which justify further fortification” (see e.g. Sun Yan v Superb Jade & Ors (unreported) HCA 813/2014, 23 October 2015 at §12 per To J).

6.  Similar principles apply to (the relatively more unusual) application to reduce the amount of fortification.  In Edward Seky Soeryadjaya & Anor v Vickers Ballas Hong Kong Limited (unreported) 1996 No A11360, 9 December 1996, Findlay J held at 7 – 8:

“What about the situation in which a diminution of the fortification is sought? … The situation before me, as I see it, is similar to that before the English Court of Appeal in Chanel Ltd v Woolworth & Co. [1981] 1 WLR 485. There, Buckley LJ said, speaking of a consent order:

‘In my judgment, an order or an undertaking to the court expressed to be until further order by implication gives a right to the party bound by the order or undertaking to apply to the court to have the order or undertaking discharged or modified if good grounds for doing so are shown. Such an application is not an application to set aside or modify any contract implicit in the order or undertaking. It is an application in accordance with such contract, being an exercise of a right reserved by the contract to the party bound by the terms of the order or undertaking.’

Buckley LJ went on to say:

‘Even in interlocutory matters, a party cannot fight over again a batter which has already been fought unless there has been some significant change of circumstances, or the party has become aware of facts which he could not reasonably have known, or found out, in the time for the first encounter’

Here, we do not have an order by consent, but the plaintiffs consented to give the undertaking in return for the injunction. There was no statement expressly that the order was until further order, but the express provision for liberty to apply has, in my view, an identical effect. The parties agreed to this provision, and the application before me is in accordance with it, just as would have been an application by the defendants for further fortification as a condition of continuance of the injunction.

  Accordingly, I hold that I am able to vary the undertaking given by the plaintiffs if there are good grounds for doing so.  By good grounds, I mean, following Buckley LJ, some significant change of circumstances.  It is not suggested by Mr Scott that the unknown facts ground exists here …”

7.  I respectfully agree.  In the circumstances, the issue before me is whether there has been a significant change of circumstances, and if so, whether such change warrants the reduction in fortification sought by Emagist HK.

8.  Since the Injunction Order, there have been a number of procedural developments:

(1)  On 14 February 2013, Emagist HK filed its statement of claim;

(2)  On 3 May 2013, the defendants filed a joint defence and counterclaim.  In the counterclaim, Ryan, Alvin, Terry, Eric, and Simon joined Boniface as the 2^nd defendant (by counterclaim).  The grounds of the defence and counterclaim were broadly those summarised in the Injunction Decision;

(3)  On 15 September 2014, Ryan, Alvin, Terry and Simon issued HCA 1815/2014 against Boniface, Eric, Emagist HK and Emagist Cayman (the “Partnership Action”).  In short, the plaintiffs in the Partnership Action claimed the existence of an oral partnership agreement between themselves, Boniface and Eric and sought inter alia a declaration that each of them was a partner with Boniface and Eric in equal shares, an account for misappropriation of partnership funds by Boniface and damages for breach of partnership agreement;

(4)  On 30 June 2015, Deputy High Court Judge Saunders ordered, by consent, that the Partnership Action be discontinued, and leave be granted to the plaintiffs in the Partnership Action to amend their pleadings in this action to incorporate the partnership claims.  This involved a redrafting of the defence and counterclaim, a point to which I will come back later.  Eric, however, does not claim partnership but rather claims damages for breach of an agreement to share Emagist HK’s profits, and for that reason, he is separately represented from the other defendants.

9.  I should also mention that on 21 August 2012, Eric presented a winding-up petition in HCCW 306/2012 against Emagist Cayman, Boniface and Emagist HK.  The petition was struck out by To J on 16 May 2013 on the grounds of lack of locus with costs on an indemnity basis.  However, nothing significant turns on this for the purposes of this application.

10.  As can be seen from the Injunction Decision, the defendants raised a number of allegations of misappropriation by Boniface of Emagist HK’s assets.  Such allegations were taken into account by the deputy judge in requiring Emagist HK to provide fortification so as to ensure that Emagist HK remained in a financial position to be able to make good on its cross-undertaking in damages (at §50):

“Regarding the opportunity to be fairly compensated, by itself and linked together with Boniface’s alleged misappropriation of the plaintiff’s money, which is argued as casting serious doubt on whether the plaintiff would be able to honour its undertaking in damages, I consider that this worry would be fairly and safely addressed by ordering the fortification of the undertaking by having a large sum of money kept untouched in a bank account. During argument, I have already suggested a substantial sum of $23 million be kept in a fixed deposit account in a bank as fortification for the plaintiff’s undertaking as to damages. I consider this sum would be sufficient to put the personal defendants’ hearts at ease because it represents roughly the plaintiff’s profits for the past years plus two more years’ net profits from the operation of the Game for their alleged total shareholding of 52.5%. The sum would be good enough for compensating them, if I am wrong, for their loss of profits for about two years, the generously estimated time span required for an action to reach trial.”

11.  Mr Ian Chau, counsel for all the defendants except Eric, argued that as a result of the partnership claims, Ryan, Alvin, Terry and Simon have a proprietary claim against Emagist HK’s assets, and therefore, the principles governing this application are a “close analog to those concerning a downward variation of a Mareva and/or proprietary injunction for the payment of legal expenses”.  Hence, he says that Emagist HK must demonstrate that it does not have, or is unable to raise, any other assets with which to fund the litigation before the court would release any of the funds from the Fixed Deposit (see e.g. Wharf Limited & Ors v Lau Yuen How & Ors (unreported) HCA 1535/2008, 21 January 2010). 

12.  With respect, I disagree.  This was not the basis upon which the deputy judge required the Fixed Deposit:

(1)  The purpose of a cross-undertaking in damages is to protect a party enjoined by an interim injunction if it subsequently transpires that it should have not been granted.  The reason is that, at the stage of an interim injunction, the parties’ legal rights and liabilities have not been ascertained.  It may turn out that the interim injunction was wrongly granted, and the cross-undertaking seeks to protect the party enjoined against that eventuality – see Griffith v Blake (1884) 27 Ch D 474 and Hoffmann-La Roche & Co AG v Secretary of State for Trade and Industry [1974] 2 All ER 1128 at 1150, [1975] AC 295 at 360 – 361 per Lord Diplock;

(2)  The function of fortification is to provide security for that cross-undertaking where there is a real risk of substantial loss by the party enjoined and that it will not be able to enforce, or at least have difficulty enforcing, the cross-undertaking should it be entitled to do so;

(3)  Its purpose is not to protect or secure any substantive counterclaims that the party enjoined may have against the party obtaining the injunction.  If the party enjoined wishes to have such protection, it can make a cross-application of its own for interim relief, whereupon it, too, will be required to give a cross-undertaking in damages (and possibly fortification);

(4)  In the present case, there was no such cross-application by the defendants before the deputy judge nor is there one before me.

Discussion

13.  As to change of circumstances said to warrant a reduction in the amount of fortification, Mr Jacky Lee, counsel for Emagist HK, advances 3 main grounds:

(1)  The defendants’ actions since the Injunction Order have led to a delay in the progress of the action such that the trial will take place significantly later than the two-year estimate referred to by the deputy judge in §50 (cited above) (the “Delay Ground”);

(2)  Contrary to the assumptions relied upon by the deputy judge, Emagist HK’s earnings have begun “to dwindle significantly”, and failed to meet the expected accumulated net profits (the “Profits Ground”);

(3)  Emagist HK faces more prejudice than the defendants unless the present application is granted (the “Prejudice Ground”).

14.  I will address briefly each of these grounds in turn.

15.  In respect of the Delay Ground:

(1)  I accept that there has been inevitable delay to the progress of the action and additional costs incurred as a result of the effective consolidation of the present action with the Partnership Action necessitating, inter alia, substantial changes to the defence and counterclaim as well as the filing of supplemental witness statements;

(2)  However, I do not regard such matters as necessarily amounting to a significant change in circumstances;

(3)  First, the partnership claim is merely a further or alternative claim, and Ryan, Alvin and Terry maintain their primary claim that the copyright to the Game belongs to them jointly as co-authors and seek a declaration to that effect;

(4)  In any event, the partnership claim is based to a large extent on the same factual matrix as the original defence and counterclaim.  Amendments of pleadings and further rounds of evidence, whilst not ideal, are an inevitable part of the cut and thrust of litigation and not something that would not have been anticipated at the time of the Injunction Order.  Moreover, delay cuts both ways: if the plaintiff were in the end to fail in this action, the longer the Injunction Order remains in place, the greater the potential loss caused to the defendants.  Emagist HK does not suggest, for instance, that the Injunction Order should be discontinued due to the delay;

(5)  Mr Lam sought to cast doubt on the credibility of the partnership claim advanced by the defendants (with the exception of Eric) on the basis of inconsistencies with its previous defence and counterclaim. In particular, it is said that the alleged partnership agreement does not sit well with their original case of agreed shareholding of Emagist HK.  That may be.  However, it is unnecessary for me to delve into this in any detail.  Having read the materials before the court, there are plainly serious issues to be tried and it would be inappropriate for me at this stage to come to any firmer view as to the likelihood of success of any of the parties;

(6)  Irrespective of the legal basis of the defendants’ defence and counterclaim, if Emagist HK were to fail in this action, there will likely be substantial loss suffered by the defendants as a result of the Injunction Order, and it is this potential loss that the cross-undertaking and fortification are intended to protect.

16.  In respect of the Profits Ground:

(1)  As indicated in §50 of the Injunction Decision, the sum of HK$23 million was said to represent “roughly [Emagist HK’s] profits for the past years plus two more years’ net profits from the operation of the Game for their alleged total shareholding of 52.5% ...”.  Hence, the deputy judge based his calculation on a figure of about HK$43.8 million (HK$23 million / 52.5%) being an estimate of Emagist HK’s past and expected profits from the Game for two years following the Injunction Decision;

(2)  Mr Lam submits that that figure is not only flawed in that it operates on an unrealistic assumption that all of Emagist HK’s profits would be distributable to its alleged shareholders, but also that HK$43.8 million was an “overly optimistic of Emagist HK’s finances for the years between the [Injunction] Decision and the notional trial of this action.” It is not open to Emagist HK, however, to relitigate such matters before me now, when the same could (and should) have been fully ventilated before the deputy judge.  There has been no appeal from the Injunction Decision;

(3)  It is also said that Emagist HK’s profits have since the Injunction Order fallen short of the anticipated profits in the Injunction Decision, and the defendants’ share of actual profits on the basis of the agreed shareholding originally contended should be some HK$8.3 million less than the Fixed Deposit;

(4)  Again, I do not agree that this amounts to a significant change of circumstances; 

(5)  The amount of HK$23 million was merely an estimate rather than a precisely calculated sum.  It is well established that the court adopts a broad-brush approach on such matters, and it is in the nature of commercial affairs that profits rise and fall depending on a multitude of factors.  Both Boniface and the defendants blame each other for the decline in Emagist HK’s profits.  I refrain from expressing any view on such complaints.  These are plainly matters for trial or possibly any hearing for the enforcement of the cross-undertaking in damages.  In any event, it is entirely possible that Emagist HK’s future profits will meet or exceed the anticipated levels.  Emagist HK does not suggest, for example, that there has been a cessation or fundamental change in the nature of its business;

(6)  Moreover, notwithstanding Emagist HK’s contention that it has reduced its expenses as a result of the decline in Emagist HK’s profits since the Injunction Order, I note the defendants’ submission that Emagist HK has nevertheless continued to incur substantial administrative and other expenses, including directors’ remuneration, housing expenses, entertainment, motor vehicle and travelling expenses, a substantial amount of which has been for Boniface’s benefit.

17.  In respect of the Prejudice Ground:

(1)  Mr Lee raises three contentions under this ground: (1) the present application would not affect the defendants’ ability to  enforce the cross-undertaking had they maintained their original case; (2) Emagist HK would face significant financial burdens unless the application is allowed due to the fact that its net assets were merely HK$5.9 million (excluding the Fixed Deposit) as per its latest managements accounts dated 31 October 2017; and (3) there is an imbalance in the parties’ positions as there is no evidence that the defendants have the means to satisfy any judgment should Emagist HK succeed at trial;

(2)  In my view, none of these contentions has any merit;

(3)  First, I do not accept that a reduction of the Fixed Deposit would not impact upon the defendants’ ability to enforce the cross-undertaking.  Mr Lee’s argument is that as Emagist HK’s net asset position has diminished, the value of the defendants’ claim of 52.5% of Emagist HK’s shareholding, as originally pleaded, would similarly be diminished.  However, this ignores, inter alia, the defendants’ primary case all along that the Game’s copyright in fact belongs to Ryan, Alvin and Terry, and the claims that the decline in Emagist HK’s net asset position is due at least in part to Boniface’s misappropriation;

(4)  Second, as to Emagist HK’s financial burdens, it is not Mr Lee’s case that its claims would be stifled unless the application is allowed, nor is it suggested that Emagist HK does not have sufficient assets at the moment to meet its legal costs.  As mentioned above, Emagist HK has some HK$5.9 million in net assets (excluding the Fixed Deposit) as per its latest management accounts, which includes around HK$3.24 million in its Bank of East Asia account and some HK$514,000 in a PayPal account.  At the least, Emagist HK’s contention is premature.  I also accept Mr Chau’s submission that having commenced this litigation and obtained the Injunction Order in early 2013, Emagist HK ought to have set aside provisions in the past several years for its anticipated legal costs; 

(5)  Further, Boniface has now been joined as a defendant to the counterclaim.  He shares common representation and advances a common or at least overlapping defence with Emagist HK to the defendants’ counterclaim, and hence, Boniface would invariably share some of the legal costs.  In this regard, I do not accept Mr Lee’s submission that this would involve a violation of separate legal personalities;

(6)  Finally, whether the defendants are in a position to satisfy any judgment against them is irrelevant.  It is an inevitable risk of litigation that a successful claimant will not be able to enforce his judgment, whether in part or in full, and this is a matter to be considered before embarking on any litigation.  More importantly, it is Emagist HK and not the defendants that has obtained the benefit of the Injunction Order to which the fortification relates.

18.  For the above reasons, I find that there has been insufficient change in circumstances to revisit the amount of the Fixed Deposit as provided for in the Injunction Decision. In any event, even had there been sufficient change, having regard to all the circumstances, I do not think that such change warrants the reduction sought.

19.  I therefore dismissed Emagist HK’s application with costs, which were summarily assessed.