RE LAU YU also known as JAFFE LAU

HCB 104/2017

[2018] HKCFI 2542

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS NO 104 OF 2017

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D E C I S I O N

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Background

1.  This is an application made by the Respondents for leave to appeal against the Decision of Deputy High Court Judge Saunders of 1 August 2018, by which he granted Chabra injunctions (“Injunctions”) against All Powerful Holding Limited (“APHL”) and All Powerful Investment Limited (“APIL”), which are not parties to the substantive bankruptcy proceedings against Mr Jaffe Lau (“Bankrupt”).  In the bankruptcy, the trustees in bankruptcy (“Trustees”) seek to set aside a transfer from the Bankrupt to APHL of one share formally held by the Bankrupt in APIL (“Transfer”), on the ground that the Transfer was a transaction at an undervalue pursuant to section 49 of the Bankruptcy Ordinance, and/or is a disposition made with intent to defraud creditors, such that the Transfer should be void.

2.  Under the Injunctions, APHL and APIL were restrained from disposing of or otherwise dealing with their funds and assets, without prejudice to their trading activity in the ordinary course of business. They were further ordered to make disclosure of certain financial information. In granting the Injunctions, the judge accepted a limited cross-undertaking as to damages given by the Trustees, for a sum of HK$40 million.

3.  The Respondents seek leave to appeal, on the ground that the judge had erred in law, (1) in holding that there was jurisdiction under the Chabra principles for the Court to grant the Injunctions against the Respondents as third parties against which the Trustees have not asserted any claim, that APHL and APIL were holding assets on trust for the Bankrupt, and (2) in finding that only a limited cross-undertaking as to damages would be sufficient as against the Trustees.  Alternatively, the Respondents argued that the judge had erred in allowing the entire costs of the application for the Injunctions to be in the cause.  If the Injunctions should not have been granted, there would be no basis to make the disclosure order which was in aid of the Injunctions.

4.  The grant of the Injunctions and the terms on which the Injunctions were granted are matters within the exercise of the Court’s discretion.  To succeed on the intended appeal, the Respondents have to establish that the judge had exercised his discretion under a mistake of law, or in disregard of principles or on misapplication of the facts, had taken into consideration irrelevant factors, or had failed to take into consideration relevant factors, such that the conclusion made was outside the generous ambit within which reasonable disagreement is possible.  This is a high threshold to surmount.

5.  Needless to say, the hearing of the application for leave to appeal is not an opportunity to repeat the arguments made before the judge.

6.  Having carefully read the Decision of Deputy Judge Saunders, I regret that I am unable to conclude that there are reasonable prospects of success in the intended appeal.

The Chabra Injunctions

7.  On behalf of the Respondents, Mr Ho SC submitted that the judge had only focused on the Bankrupt’s alleged control of APIL and APHL, and had disregarded the 2^nd limb of the requirement established in the judgments in XY, LLC v Jesse Zhu & Anor [2017] 5 HKC 479 and Parbulk II AS v PT Humpuss Intermoda Transportasi TBK & Ors [2011] 2 CLC 988, that substantial control is not of itself enough for the grant of an exceptional order in exercise of the Chabra jurisdiction.  In its judgment in Parbulk, the English Commercial Court emphasized the following:

“It is not enough that the CAD could, if it chose, cause the assets held by the NCAD to be used to satisfy the judgment. It is necessary that the court be satisfied that there is good reason to suppose either (i) 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 (ii) that there is some other process of enforcement by which the claimant can obtain recourse to the assets held by the NCAD.”

8.  In Jesse Zhu, the Court of Appeal followed the same analysis, concluding that 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”. 

9.  The courts in these cases were attempting to explain and give guidelines as to the circumstances in which, in the exercise of the court’s discretion, the appropriate order may be made, at the interlocutory stage, against assets of third parties not made defendants and against which no cause of action has been asserted.  The guidelines should not be read as if they were statutory provisions.  At paragraph 25 of the judgment of Hon Kwan JA in Jesse Zhu, Her Ladyship referred to the judgment of the High Court of Australia in Paul Cardile v LED Building Proprietary Ltd (1999) 198 CLR 380:

“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.”

10.  As Kwan JA pointed out at paragraph 26 of her judgment in Jesse Zhu, the 2^nd limb of the principle is “potentially of extremely wide application”.

11.  I do not agree that Deputy High Court Judge Saunders had disregarded the principle that substantial control is not the only factor required for invoking the Chabra jurisdiction, and that (as Mr Ho argued) the judge had failed to give regard to the fact that the assets of the NCAD should be amenable to execution or enforcement under judicial process, so that the assets would be available to the judgment creditor of the Bankrupt as a consequence of a judgment against the Bankrupt (“2^nd limb requirement”). 

12.  At paragraph 88 of the Decision, the judge stated expressly:

“I accept of course that Mr Lau, as only a shareholder in APIL, did not own the company’s assets nor did the company hold those assets on trust for Mr Lau. But, as will be seen from the discussion below, the assets owned by APIL, ostensibly a substantial company, are assets which may be accessed by Mr Lau’s creditors in order to satisfy his debts.” (Emphasis added)

13.  The judge then proceeded to deal with and made findings on (inter alia) the existence of a good arguable case of an attempt made by the Bankrupt to defraud creditors as evidence of a real risk of dissipation of assets, the steps taken by the Bankrupt to ring-fence the assets of APIL, raising a strong argument of the abuse of the corporate veil and the concept of trusts, and the fact of the Trustees becoming the sole shareholder in APIL if the Transfer to APHL is reversed.  At paragraph 108 of the Decision, the judge stated:

“If the share transfer is reversed, the liquidator becomes the sole shareholder in APIL. Clearly, the liquidator cannot then simply sell APIL’s assets to satisfy Mr Lau’s debts. But the liquidator can take steps, lawfully, to wind up APIL, and distribute the assets to those lawfully entitled to those assets or the funds arising from realization.”

14.  The judge then referred to Gee on Commercial Injunctions, and to other creditors of APIL having to be paid off in the event of a winding up of APIL, before ascertaining any surplus which may be distributed to the Trustees as the shareholder, for applying those funds in the satisfaction of the Bankrupt’s creditors.  He concluded thus in paragraph 111:

“There being a lawful process, which does not involve the piercing of the corporate veil, by which the liquidator may ultimately access the assets of APIL and APHL for the benefit of Mr Lau’s creditors, I have no doubt at all that those assets should be secured to be available for the benefit of Mr Lau’s creditors.”

15.  It can be seen that the winding up of APIL, by the Trustee as its sole shareholder, is the “lawful process” to which the judge referred, as being the “process, ultimately enforceable by the courts”, which is available to the judgment creditor, or pursuant to which, the NCAD/third party may be obliged “to disgorge property or otherwise contribute to the funds or property of the judgment debtor (ie the Bankrupt in this case) to help satisfy the judgment against the judgment debtor”.  It is apparent that this, in the deputy judge’s view, constituted and satisfied the 2^nd limb requirement of Paul Cardile v LED Building Proprietary Ltd.

16.  Mr Ho relied on the case of Lakatamia Shipping Co Ltd v Su and ors [2015] 1 WLR 291, which was cited to the learned deputy judge, as authority for the proposition that the possibility of winding up proceedings being instituted against APIL (by the Trustee as shareholder) is not sufficient to justify the making of the Injunctions.  Mr Ho referred in particular to paragraph 52 of the judgment in Lakatamia, where Rimer LJ referred to a receiver being in a position to deploy his rights over the defendant’s shareholding to achieve a winding up of the companies and, in consequence, a distribution to himself of the surplus assets of the companies, and remarked:

“Such a possibility still does not mean that the assets of the companies are assets of the 1^st defendants so as to fall within the terms of the freezing order.”

17.  The court in Lakatamia was dealing with the terms of a freezing order, and making the distinction that the assets of a company the shares in which were entirely owned by a defendant were not assets of the defendant for the purposes of the language used in the freezing order.  Read in its context, I do not consider that Lakatamia is applicable to the present case, as authority that the Chabra jurisdiction of the court cannot be extended to the assets of APIL.  The assets of APIL indeed remain APIL’s assets, but upon winding-up of APIL, these assets of APIL may be available to the creditors of the Bankrupt to help satisfy any judgment against the Bankrupt.

18.  On my reading of the Decision, I cannot agree that the learned deputy judge had erred by overlooking the 2^nd limb requirement and disregarding the proper test for the grant of the Injunctions, under the Chabra jurisdiction, against APIL and APHL to extend to their assets.  Nor can it be said that he had failed to take into consideration relevant factors or had taken into account irrelevant factors.  He made it quite clear at paragraph 107 of the Decision that the corporate veil was not being pierced.

The limited cross-undertaking

19.  As for the limited cross-undertaking as to damages, the grant of the same is a matter within the discretion of the judge. The Respondents emphasized that the default position is that an applicant for interim injunction should be required to give an unlimited cross-undertaking in damages, as the price for the interim injunction sought, and that there are only limited exceptions to this general rule.  The case of JSC Mezhdunarodniy Promyshlenniy Bank v Pugachev [2016] 1 WLR 160 relied upon by Mr Ho makes it clear: the acceptance of a limited cross-undertaking is within the scope of the court’s discretion.  The extent of the cross-undertaking required, whether a limited cross-undertaking is accepted, or refused, are all discretionary, and it follows that the judge’s decision one way or the other will not be upset by the Court of Appeal except on the usual grounds for interfering with the exercise of judicial discretion. 

20.  The matters which the deputy judge took into consideration in accepting the limited cross-undertaking from the Trustees in this case are reflected in the Decision.  These include the matters he referred to, not only under the heading of “The Undertaking”, but in other parts of the Decision including the part under “The balance of convenience”.  It can be seen from reading the Decision that the deputy judge had considered the fact that the litigation is brought by the Trustees for the benefit of the estate of the Bankrupt and the Bankrupt’s creditors as a whole (that on the Trustees’ evidence it was “in the interests of justice to stop APIL from further depleting its assets”, and the need to preserve the status quo).  The judge also took into consideration the fact that the Trustees were unable to obtain insurance against unlimited liability and that there were no large creditors to fully indemnify the Trustees, but that eventually, HSBC, the creditor behind the Trustees, was able to offer indemnity to the extent of Hong Kong HK$40 million.  The judge pointed out (paragraphs 132 and 133 of the Decision) that the burden did not lay on the Respondents to demonstrate that the wrongful grant of the Injunctions would cause some loss to them, and considered (paragraph 138 of the Decision) that he had to follow the approach set out in RBG (Resources) PLC v Rastogi & Ors [2002] BPIR 1028, to make “an intelligent estimate of the likely amount of any loss which may result from the grant of the injunction”.  These are all appropriate and relevant considerations. 

21.  In considering the amount of the undertaking as to damages, Counsel for the Trustees highlighted, and the judge pointed out in paragraph 120 of the Decision, that the evidence before the Court as to the extent and nature of the business operated by APIL was “sparse” and “vague”.  The only evidence before the judge was the fact that APIL had facilities from Fubon Bank for HK$34.5 million, which might arguably be jeopardized, but that the bank had informed the Trustees that there was no intention to withdraw the facilities, and that such facilities were secured.  He concluded that a limited undertaking up to HK$40 million was appropriate in the case.

22.  On reading the Decision, I cannot agree that the Deputy Judge had misapplied the law, or had failed to take into consideration relevant factors, or had considered irrelevant matters, in exercising his discretion to accept the limited cross-undertaking as to damages, and fixing this in the sum of HK$40 million.  There are no reasonable prospects of success that the Court of Appeal would disturb the judge’s decision and his assessment of the appropriate amount for the cross-undertaking.

Disclosure and costs orders

23.  Since I consider that there is no reasonable prospect of success for the appeal against the grant of the Injunctions, the same applies to the proposed appeal against the disclosure order.  Nor am I satisfied that there are reasonable prospects of success for the intended appeal against the costs order, when costs are discretionary and there are reasonable grounds for ordering that the costs should be in the cause in this case.

Disposition

24.  For all the above reasons, the application for leave to appeal has no reasonable prospects of success in my view, and ought to be dismissed, with costs.