COSIMO BORRELLI as Trustee of the SFC LITIGATION TRUST v. ALLEN TAK YUEN CHAN AND OTHERS

HCMP 2174/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 2174 OF 2014

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D E C I S I O N

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1.  This is an application made by the plaintiff, being the Trustee of the SFC Litigation Trust (“Trustee”), to compel the 2^nd defendant (“Hu”), 3^rd defendant (“Grace”) and 4^th defendant (“Joyce”) to comply with the disclosure orders made by Chow J on 9 January 2015 and 12 November 2015.

2.  These proceedings were brought by the Trustee, representing the creditors of Sino Forest Corporation (“Sino”), against the 1^st defendant (“Chan”), the former Chairman and Chief Executive Officer of Sino, which is a public company listed on the Toronto Stock Exchange, for breach of fiduciary duties.  The claim is that Sino had been defrauded by Chan, who had allegedly procured many fictitious transactions to be entered into by Sino or its subsidiaries, which had resulted in very substantial funds having been diverted to himself or his nominees.  Mareva injunctions have been granted in Ontario and Hong Kong against Chan.  In Hong Kong, the injunction order was granted on 29 August 2014 (“Order”), initially against Chan only as defendant, whereby he was restrained from removing or disposing of his assets up to the value of HK$2.25 billion. 

3.  On 9 January 2015, Chow J extended the Order (on the Chabra basis) to cover 3 specified bank accounts maintained by Grace, Joyce and Hu with the Standard Chartered Bank in Hong Kong (“SCB Accounts”).  In his Decision of 9 January 2015, Chow J pointed out that on the basis of the materials before him, he had little difficulty in coming to the view that there were good reasons to suppose that Chan had substantial control over the 3 sums of money (totaling US$6.5 million “Monies”) transferred to Hu, Grace and Joyce (paragraph 6 of his Decision), and further, that there was certainly a possible inference to be drawn on the existing evidence that the Monies were held by Hu, Grace and Joyce as nominees for Chan (paragraph 8 of the Decision).  Grace and Joyce are the daughters of Chan, and Hu has been described as Chan’s close companion.

4.  Under the order made by Chow J on 9 January 2015 (“Chow Order”), Grace, Joyce and Hu were to disclose by affidavit within 7 days how the Monies they had received from Chan “have been used and expended and the current whereabouts of the money (or any part thereof) with full particulars and documents in support”.  There is no further dispute as to the terms of the Chow Order.

5.  An unless order was made by Chow J on 12 November 2015 (“Unless Order”), compelling Hu, Grace and Joyce (who had by then been joined as 2^nd, 3^rd and 4^th defendants respectively on 6 November 2015) to comply with the Chow Order on or before 10 December 2015.  The parties had disputed the meaning and effect of the Chow Order, and whether the Chow Order required Grace, Joyce and Hu (collectively “3^rd Parties”) to provide a historical trail of fund flow of the Monies from the SCB Accounts. In granting the Unless Order, Chow J has clearly explained the Chow Order, and put its meaning and effect beyond any further dispute. 

6.  In paragraphs 14 and 15 of his Decision of 12 November 2015, Chow clarified the purpose of the Chow Order, as follows:

“In other words, the Disclosure Order was made with the view of achieving a proper balance between on the one hand avoiding the oppression that might be caused to the 3^rd Parties by a wide injunction covering all their “properties and assets” and on the other hand enabling the plaintiff to trace the Monies into assets (if any) currently held by the 3^rd Parties so that the plaintiff could apply for further injunctive relief (if so advised) in respect of such current assets.

Mr Chain (for the 3^rd Parties) accepts that the wording of the Disclosure Order is arguably wide enough to mean that a historical trail of fund flow of the Monies from the SCB Accounts should be provided by the 3^rd Parties.  For my part, I consider that to be the natural and ordinary meaning of the words used in the Disclosure Order.  Even if there should be any doubt about the matter (which I do not think there is), the context and background of the Disclosure Order would, in my view, strongly support the view that it does require the 3^rd Parties to provide a historical trail of fund-flow of the Monies from the SCB Accounts.” (Emphasis added)

7.  Following the making of the Unless Order, the 3^rd Parties made further affirmations in December 2015, in purported compliance with the Chow Order and the Unless Order.  The Trustee claims that notwithstanding these affirmations, the 3^rd Parties have still failed to comply with their obligation of disclosures.  In summary, the Trustee claims that although the 3^rd Parties have provided bank statements with their affirmations, these statements were provided in a piecemeal fashion after January 2016 and were still incomplete, that parts of the bank statements were redacted, and that the 3^rd Parties have not disclosed all the recipients of the proceeds paid out of the Monies.

8.  The 3^rd Parties on their part claim that they have disclosed the trail of the fund flow from the SCB Accounts, that the 3^rd Parties’ oath that they have done so should be conclusive, and that the heavy burden is on the Trustee to establish that the 3^rd Parties have not done so, or that the redacted information is not irrelevant (as the 3^rd Parties claim).  Counsel for the 3^rd Parties relies on Mimi Kar Kee Wong Hung v Severn Villa Ltd [2012] 1 HKLRD 887.

9.  I agree with Counsel for the Trustee, that at this stage, it is no longer open to the 3^rd Parties to further argue whether or not the Monies belonged to Chan, or to dispute that under the Chow Order, and as explained in the Unless Order, the 3^rd Parties are compelled to provide a historical trail of the fund-flow of the Monies from the SCB Accounts.  In the exercise of the Chabra jurisdiction of the Court, the Order was extended to the SCB Accounts, which were not in Chan’s name, but in the name of the 3^rd Parties to whom Chan had transferred the Monies.  In making the Chow Order, the Court was satisfied that Chan had substantive control over the 3^rd Parties.  Under the Chow Order, the 3^rd Parties are to provide a historical trail “of the Monies in the SCB Accounts”.  If it can be objectively seen that the Monies in the SCB Accounts were paid out, a historical trail has to be provided, and the recipients of the payments identified.

10.  The Court of Appeal’s decision in Mimi Kar Kee Wong Hung v Severn Villa Ltd, as relied upon by the 3^rd Parties, related to a party’s application for a further and better list of documents, to disclose further accounting records referred to in affirmations filed, and for unredacted copies of the documents already disclosed, when a party had gone on oath to confirm that the redacted parts were irrelevant to the issues to be tried.  In this context, the Court of Appeal referred (in paragraph 51 of the judgment of Kwan JA) to Jones v Andrews (1888) 58 LT 601, 604 and GE Capital Corporate Finance Group v Bankers Trust Co [1995] 1WLR 172, and stated:

“The oath of the party giving discovery is conclusive, ‘unless the court can be satisfied - not on a conflict of affidavits, but either from the documents produced or from anything in the affidavit made by [that party], or by any admission by him in the pleadings, or necessarily from the circumstances of the case - that the affidavit does not truly state that which it ought to state’. ... The test is whether it is not unreasonable to suppose that the parts redacted do contain information which may, either directly or indirectly, enable Ms Wong to advance their own case or to damage the defendants’ case. A heavy burden lies on the party who seeks to challenge the veracity of the other party’s oath regarding redaction.”

11.  For the Trustee, Miss Sit pointed out that the last remark made in relation to the heavy burden deals with redaction only, and not disclosure generally.  She also referred to the appropriate test set out in China Metal Recycling (Holdings) Ltd (in prov liq) v Chun Chi Wai, HCA 1412/2013, unreported, 17 November 2014.  There, in making an unless order for the defendants’ disclosure of assets, the learned judge considered whether the defendants’ explanation is on the face credible and consistent with contemporaneous documents and/or their previous statements.

12.  As Miss Sit has illustrated from the entirety of the 3^rd Parties’ own affirmations and the documents exhibited by them, I am satisfied that when the bank statements produced are objectively considered, it can be seen that the 3^rd Parties have failed to fully disclose and provide a historical trail of the fund-flow of the Monies, and how they were paid out from the SCB Accounts.  Miss Sit has taken me through the bank statements and related documents, and shown to my satisfaction how the Monies were paid into the SCB Accounts, and how it can be seen from the documents exhibited by the 3^rd Parties that after the Monies were received by the 3^rd Parties, the Monies were used to purchase 3 unit trusts, which were redeemed, and the proceeds used to purchase new unit trusts, which were then redeemed in mid-2014 when it became known that the Trustee had commenced proceedings against Chan in Ontario, and that immediately after the grant of the Mareva injunctions in Hong Kong and in Ontario, the proceeds were paid out by the 3^rd Parties to unidentified persons. 

13.  The 3^rd Parties sought to explain their failure to account for the flow of parts of the Monies, on the basis that they had mentally kept a ledger of what expenses and payments they made were attributable to the Monies received.  Grace’s statement in paragraph 6 of her 5^th affidavit summarizes the 3^rd Parties’ stance:

“To me, the receipt of the Sum meant that my net wealth increased by HK$20,224,100 which made me substantially more wealthy and financially secure. Since I received such a substantial gift money from my father, it had subsequently caused me to have spent a lot of money in purchasing items and making investments which I would not have otherwise done but for the receipt of the Sum. I have therefore considered that the spending and investments were made out of the Sum. When I wanted to spend money from the Sum, regardless of which bank account that money was drawn from, in my mind I would mentally treat that I was spending the money from the Sum. It was on this basis that I spent the Sum, and this was how I identified how I used and expended the Sum, and the current whereabouts of the Sum ... by reference to my intention at the time.”

14.  On that basis, although no causative link can be seen between the Monies in the SCB Accounts and some payments and expenditure claimed to have been made by Grace, these payments were asserted by her to have been made from the Monies. Grace also claims that certain withdrawals or transfers which can be seen, objectively, to have been made from the SCB Accounts did not come from the Monies.  Likewise, Joyce only accounts for payments withdrawn or transferred from the SCB Accounts on the basis of what she had mentally attributed to the Monies. 

15.  I regret that I do not find these assertions made by the 3^rd Parties (that they had mentally allocated expenditure to the Monies in the SCB Accounts, regardless of the actual bank account from which the expenditure was made) to be credible.  Nor do I believe the 3^rd Parties, when they claim that the source of various payments and transfers made from the SCB Accounts were in fact unrelated to the Monies.  These assertions and claims by the 3^rd Parties are self-contradictory, and are not supported by the contemporaneous documents themselves.  Bearing in mind the timing of the payments in and out of the SCB Account, the 3^rd Parties’ versions and explanations are most improbable and unbelievable.  Nor can I believe their bare assertions that transfers and payments made from the SCB Accounts to the unidentified recipients, and the redacted entries in their bank statements, were all unrelated to the Monies. 

16.  As Counsel for the Trustee pointed out, there are inconsistencies in the affirmations filed by the 3^rd Parties at different stages.  The use of the Monies to purchase unit trusts, the redemption of the unit trusts and the payment of the proceeds out of the SCB Accounts were not mentioned in any of the earlier affirmations filed by the 3^rd Parties, until their latest 5^th affidavits and affirmation filed in April 2016, when admissions were made by them that at least some of the Monies had been used to purchase those unit trusts.

17.  As explained in paragraph 12 above, I am satisfied from what I have seen that on the face of the documents provided by the 3^rd Parties, the purchase of the unit trusts and the proceeds of their redemption which from the bulk of the funds in the SCB Accounts all stem from the Monies.  A historical trail must therefore be provided by the 3^rd Parties of all the payments out from these funds.

18.  In the case of Joyce, she claimed that of the money redeemed from the unit trusts purchased with the Monies, HK$5 million was paid out of the relevant SCB Account in September 2014, as a loan to her friend Gloria.  It is alleged that the loan carries no interest, has no repayment date and that the only evidence of the loan is an ex post facto note  from Gloria, dated 9 December 2015 (“Note”), that the HK$5 million was a loan from Joyce. Joyce also claims that she had issued a cashier order to Gloria for HK$1.8 million from the Monies on 6 September 2014, which was “mainly for the purpose of funding the purchase of a motor vehicle to replace Joyce’s previous one”.  The Note from Gloria confirmed that of the HK$1.8 million, $500,000 was for buying a motor vehicle for Joyce.  However, these statements of Joyce and Gloria are inconsistent with the vehicle registration document exhibited, which shows that the owner of the vehicle is Gloria, and not Joyce.

19.  In Hu’s case, she admits in her 5^th affirmation that the Monies had been applied towards purchasing unit trusts.  Her claim that HK$10,525,000 of the Monies she had received had been paid out on 19 September 2014 is incredulous, when it has been shown that the monies she had received from the redemption of the unit trusts were only credited into her bank account on 20 September 2014, before the alleged payment out.  Instead, HK$10,525,000 from the redemption monies was only paid out by her on 22 September 2014, and she has failed to disclose the payee of the amount.

20.  In any event, the Chow Order and the Unless Order require the 3^rd Parties to give the fund flow of the Monies that can be seen to be maintained and kept in the SCB Accounts.  It is not sufficient for the 3^rd Parties to refuse disclosure under the orders on the ground that mentally, they had not intended the payment out or transfer from the SCB Accounts to be attributed to the Monies.

21.  It has to be borne in mind that the claims made against Chan are proprietary in nature. As Hoffman J (as he then was) highlighted in the case of Arab Monetary Fund v Hashim and others (No 5) [1992] 2 All ER 911, by reference to the oft-quoted passage of Templeman LJ’s judgment in Mediterranea Raffineria Siciliana Petroli SpA v Mabanaft GmbH [1978] CA Transcript 816 in the Court of Appeal:

“A court of equity has never hesitated to use the strongest powers to protect and preserve a trust fund in interlocutory proceedings on the basis that, if the trust fund disappears by the time the action comes to trial, equity will have been invoked in vain.”

22.  Where discovery is sought against a person who is not a party to an action, but who is “mixed up in the tortious acts of others so as to facilitate their wrongdoing” (Norwich Parmacal Co v Customs and Excise Comrs [1973] 2 All ER 943 at 948), such person has a duty to assist the party who has been wronged by giving him full information and disclosing the identity of the wrongdoers. The Norwich relief was extended to cases in which a plaintiff wanted to know, not the identity of the wrongdoer, but what he had done with misappropriated money (eg Bankers Trust Co v Shapira [1980] 3 All ER 353). The court made it clear in Arab Monetary Fund that the Bankers Trust order can extend to the disclosure of information:

“It rests upon the proposition that unless the assets in question can be located and secured, the ultimate determination of ownership of those assets may be frustrated by their removal or dissipation and there will be no point in calling on the third party at the trial to produce the required documents or give the requested information. In my judgment, therefore, the first principle of the Bankers Trust case is that the plaintiff must demonstrate a real prospect that the information may lead to the location or preservation of assets to which he is making a proprietary claim.”

23.  I do not agree that the Trustee is embarking on a fishing expedition, or acting on the basis of his speculation and guesses.  On the evidence presented, there is a real prospect that the information sought from the 3^rd Parties, including the information now redacted by them, might lead to the location and preservation of the Monies.

24.  Bearing in mind the objective of the Chow Order and the Unless Order, as stated in paragraphs 14 to 16 of Chow J’s Decision of 12 November 2015, it is clear that the 3^rd Parties have not complied in full with the Unless Order, and it is appropriate for the Court to give effect to the stated purpose of the Chow Order and the Unless Order by ordering the 3^rd Parties to provide further and specific information.  They should file corrective affidavits to give a full and accurate account of the historical trail and the current whereabouts of the Monies.  They should in particular disclose the recipients of the amounts which are seen to be paid out of the SCB Accounts and are, on the face of the documents disclosed, attributable to the redemption monies from the unit trusts purchased with the Monies.  These are, in Hu’s case, the HK$10,525,000 paid out on 22 September 2014; in Grace’s case, the amounts paid out on 17 March 2014, 1 September 2014, 5 September 2014, 22 September 2014 and 23 September 2014; and in Joyce’s case, the amounts paid out on 1 September 2014, 6 September 2014, 22 September 2014 and 19 January 2015.

25.  The 3^rd Parties have had more than sufficient and reasonable time to comply with the Chow Order which was made on 9 January 2015, and the Unless Order which was made on 12 November 2015.  I have indicated in the course of the hearing that it might be more appropriate for the Trustee simply to enforce the orders by contempt proceedings, but bearing in mind the objectives intended to be achieved by the orders, I agree that it would be appropriate for this Court to give a final opportunity to the 3^rd Parties, and to order them to comply with the Chow Order and the Unless Order by filing corrective affidavits within 21 days from the date of handing down this Decision. 

26.  An order is accordingly given in terms of the Trustee’s summons issued on 1 March 2016, which includes the provision of unredacted copies of all bank statements exhibited to the 3^rd Parties’ affirmations.