CHEER SIGNAL DEVELOPMENT LTD v. WONG SIU FAN AND OTHERS

HCA 780/2015

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 780 OF 2015

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D E C I S I O N

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Index Paragraph

A.. INTRODUCTION.. 1

B.. CHEER SIGNAL’S APPLICATION TO ADDUCE FURTHER EVIDENCE  4

C.. APPLICATION FOR CONTINUATION OR DISCHARGE OF THE MAREVA INJUNCTION.. 9

D.. ANALYSES OF THE PLAINTIFF’S CASE. 15

E... THE DEFENDANTS’ CASES. 36

F... MATERIAL NON-DISCLOSURE. 47

G.. FINDINGS ON GOOD ARGUABLE CASE. 109

H.. RISK OF DISSIPATION OF ASSETS. 112

I.... CASE AGAINST THIRD PARTIES. 123

J.... BALANCE OF CONVENIENCE. 125

K.. SUMMONS TO ARGUE THAT THE INJUNCTION WAS PROPRIETARY IN NATURE. 135

L... CONCLUSION.. 143

A.  Introduction

1.  This case concerns a business that involved sham transactions.  The issue is who the mastermind was.  The Plaintiff (“Cheer Signal”) says that Wong (D1) and Ling (D2) were the mastermind who jointly perpetrated a Fraudulent Scheme with other Defendants.  The Defendants say that it was 2 top officials of Cheer Signal and its parent company, Zhuhai Duty Free.

2.  Cheer Signal obtained, ex parte, a Mareva injunction freezing assets of the Defendants and the Third Parties up to a value of HK$127,417,625, representing its loss.  Cheer Signal now applies for:

(1) Leave to adduce further evidence;

(2) Continuation of the Mareva injunction;

(3) Leave to vary the terms of the Mareva injunction to delete the usual exceptions for ordinary living and legal expenses, contending that the injunction is proprietary in nature.

3.  The Defendants and Third Parties seek to have the Mareva injunction discharged on the grounds of material non-disclosure and lack of risk of dissipation of assets.  They also oppose the 2 leave applications.

B.  CHEER SIGNAL’S APPLICATION TO ADDUCE FURTHER EVIDENCE

4.  Cheer Signal seeks to adduce Deng-3^{rd [1]}.  It exhibited a CD rom which Cheer Signal claimed to contain 3 audio recordings and the transcript of a meeting on 13 November 2012.  I have dismissed this application at the hearing.  Here are the reasons. 

5.  Cheer Signal’s affirmation in reply was filed on 12 August 2015 on an unless order basis.  Six days later, it issued this summons.  Hearing of the Mareva injunction summons was to be 6 more days later.  Such late production of evidence was in itself a reason for its exclusion.

6.  Further, there was no proper explanation from Cheer Signal as to the lateness of the evidence.  Deng claimed that the audio recordings “were only recently found” by Cheer Signal.  It was not even stated if they were found after Cheer Signal’s affirmation in reply.

7.  The recordings and transcript were extracts only.  The 3 “clips” did not join up.  The person who produced it was ZH Duty Free’s General Manager Liang who allegedly made and kept the recordings “for her own record keeping purposes”.  It was not clear if there were other recordings and where they were.

8.  The Defendants were simply left without a reasonable opportunity to even verify the recordings or accuracy of the transcripts, and take instructions on them.  I therefore excluded the evidence.

C.  APPLICATION FOR CONTINUATION OR DISCHARGE OF THE MAREVA INJUNCTION

9.  To seek a Mareva injunction, Cheer Signal has to show (1) a good arguable case; (2) that there are assets within the jurisdiction; (3) there is a real risk of dissipation of assets; and (4) the balance of convenience lies in favour of a grant.  See Hong Kong Civil Procedure 2015, Vol 1, §29/1/56.  Item (2) is not in dispute in this case.

10.  At the ex parte stage, an applicant has a duty to make full and frank disclosure: Hong Kong Civil Procedure 2015. §29/1/51.  He has to disclose all matters relevant to the “weighing operation” that the court has to consider in deciding whether or not to grant the ex parte relief, and also to identify matters of fact or law which could reasonably be raised by the defendant against the making of the order had he been present at the application provided that (a) the defence is one which can be reasonably be expected to be raised in due course by the defendant or (b) is not one which can be dismissed as without substance or importance.  See TYG Capital Fun v Hilda Hor Yee Chan, unreported, HCA 1585/2014, 25^th August 2014, at §39 per DHCJ Marlene Ng. 

11.  Material non-disclosure can cause the Mareva injunction to be discharged with or without a regrant: In Excel Courage Holdings Ltd v Wong Sin Lai [2014] 3 HKLRD 642, the Court of Appeal.

12.  The applicant’s case must be more than barely capable of serious argument, but not necessarily one which the judge considers would have a better than 50 per cent chance of success.  Showing a prima facie case is not the appropriate test, at least where the respondent has adduced evidence in opposition. The plaintiff has to do substantially more than show that the case is merely “arguable”.  At the end of the day the court must consider the evidence as a whole in deciding whether or not to exercise the statutory jurisdiction.  See Lam Sik Ying v Lam Sik Shi, unreported, HCA 4713/2001, 14^th January 2011, at §§9-10 per Recorder Benjamin Yu SC.

13.  The fact that a defendant can show some defence does not mean that the plaintiff does not have a good arguable case.

14.  In the context of an application to continue a Mareva injunction, whilst it is not the function of the court at this stage to make any finding of fact or attempt to resolve conflicts of evidence disclosed in the affidavit evidence filed, the court is, however, entitled and obliged to take into account the apparent strength or weakness of the parties’ respective cases to decide whether the plaintiff’s case, on the merits, is sufficiently strong to cross the threshold of a good arguable case and on the ultimate question of whether it is just and convenient to continue the injunction.  Helm Hong Kong Ltd v Au Tat Kei, Decky, HCA 1517/2006 (unreported, 13 December 2006), per Recorder Yu, SC at §6. 

D.  ANALYSES OF THE PLAINTIFF’S CASE

15.  Cheer Signal was incorporated in Hong Kong as a “window company” of a PRC state-owned enterprise, ZH Duty Free (collectively “the Plaintiff’s camp”).  The 3 shareholders (also directors) of Cheer Signal hold the shares on trust for ZH Duty Free.  One of them is Huang Zhentang (“Huang”), also the Chairman and General Manager of Cheer Signal.  Another is Deng Weiping (“Deng”), also its President.

16.  The Defendants can be divided into 3 camps:

(a) The Consultants, ie Wong (D1), Ling (D2) and their company Orthodox (D5), who were retained by Cheer Signal for plans to get listed on the Hong Kong Stock Exchange. 

(b) The Chan (D4) camp, ie Mr Chan (D4) who played a key role in the entities through which Cheer Signal had traded.  In particular, Astroway (TP1) is a BVI company apparently controlled by him, which is the ultimate holding company of D6 to D9.  Astroway apparently also controls Wing Sang Holdings (TP2), a Hong Kong company.  TP2 holds D8 (which in turn owns D9).  TP2 apparently controls Wing Sang International (TP3), a Hong Kong company which shares the same registered office as Orthodox (D5).

(c) Mr Mak (D3), a former associate of Orthodox who was Vice-President of Cheer Signal between 1 May 2011 and 3 September 2013.

17.  Wong (D1) and Ling (D2) were first known to Cheer Signal as professionals working for a bank.  Between 2005 and 2010, the two of them gained the trust and confidence of the Plaintiff’s camp.  Cheer Signal needed business independent of Zhuhai Duty Free in order to obtain listing status in the Hong Kong Stock Exchange.  Sometime in 2010, Cheer Signal approached Wong (D1) and Ling (D2) for assistance. 

18.  In mid-2011, Wong (D1) and Ling (D2) devised what turned out to be the Fraudulent Scheme whereby:

(a) Cheer Signal would engage Orthodox (D5) as consultant.

(b) Cheer Signal would commence a seafood products business.

(c) Golden Sea (D6), introduced by Wong (D1) and Ling (D2), would be the upstream seller of seafood products. 

(d) One Ying Fai Fishery International Ltd (“Ying Fai”) would be the downstream buyer of Cheer Signal.

(e) Ying Fai was later replaced by Riches Development (D7).  D8 to D9 were later added as downstream buyers.  They were all introduced by Wong (D1) and Ling (D2).  They were said to be experienced buyers with operating teams that have years of experience in the fishery trade and strong network of retail customers.

(f) Cheer Signal would buy seafood products from the upstream seller on 3 days’ advance payment terms and in turn sell to the downstream buyers at a higher price on 30 days’ credit.  The difference in price would represent Cheer Signal’s profits.  The seafood products would be delivered by the upstream seller directly to the downstream buyers. 

(g) For the purpose of listing, Wong (D1) and Ling (D2) would arrange for Cheer Signal to eventually acquire the upstream seller and downstream buyers (“the acquisition”). 

(h) Mak (D3) (originally staff of Orthodox (D5)) was engaged by Cheer Signal as Vice President to manage the seafood products business on a day to day basis.  He was to work closely with Orthodox (D5) to oversee that business.

19.  The seafood products business had been run from about August 2011 to September 2013 with a purported sales volume of $970m and gross profit of $25m. 

20.  It is Cheer Signal’s case that the upstream seller and downstream buyers were introduced by Wong (D1) and Ling (D2) as independent entities when in fact they were secretly controlled by the 2 of them.  Chan (D4), who was the husband of Wong (D1), was the common bank signatory of these corporate entities.  Exploiting the time gap, monies paid to the upstream seller by Cheer Signal in advance would be routed to the downstream buyers to pay back to Cheer Signal on credit terms.  Mak (D3) was “deliberately planted” by Wong (D1) and Ling (D2) in Cheer Signal to facilitate such fraudulent flow of its funds out from one pocket to another under the illusion of sham transactions.

21.  In December 2012, Cheer Signal changed its top management. Sometime in September 2013, as the management of Cheer Signal decided to supervise Cheer Signal’s business more closely, the 3 downstream buyers suddenly stopped paying.  It left Cheer Signal out of pocket in the amount of about $120m in terms of advance payments to the upstream seller.  The seafood products business came to a halt.

22.  Not being aware of the fraud, Cheer Signal paid Orthodox (D5) monthly consultancy fees for 2014 for it to assist in recovering monies from the downstream buyers.

23.  Separately, Cheer Signal demanded for payment from D7-9 directly, only to meet with the response that they had never received any goods from Cheer Signal.

24.  The Fraudulent Scheme “came to light” in October 2014 upon Cheer Signal’s investigation.  The matter was reported to the police. Having been informed by the police that it would soon take steps against the Defendants, Cheer Signal commenced the present action.  So far, no charge has been laid against anyone.

25.  It is Cheer Signal’s case that Wong (D1), Ling (D2) had exploited its trust and confidence in them.  Viewed as whole, each of the Defendants acted in furtherance of a common design.  Cheer Signal seeks a declaration that each of the Defendants holds the HK$127m (including HK$7.41m consultancy fees) on constructive trust for it, alternatively for damages for deceit or conspiracy to defraud or to injure. 

26.  Standing on its own, Cheer Signal might have a good arguable case.  However, it is of interest to note the exchange between L Chan J and Mr Chain (then counsel for Cheer Signal) at the ex parte hearing:

“Court: Yes, Mr. Chain, I understand the scheme … they were taking payment in advance for the so-called supplies, and when they supposedly purchased from you they keep you on credit. They will pay you when they have funds … by this means maybe they may have a box of fix [sic: fish] circulating around … But how come the people can be so stupid? … It’s stained [sic: state] money. It’s the people’s money.

…

Counsel: Well, my Lord, I think I do have to say that there was a certain degree of, perhaps, naivety on the party [sic: part] of Cheer Signal in this case …

Court: And these people who suffer from this deprivation of common sense and intelligence, these people they are occupying high places.

…

Counsel:  Well, my Lord, I think it’s some consolation that the people in charge, if you will, of the people’s assets have not lined their own pockets, they’ve been deceived by other people.”

(underlining added)

27.  At this hearing, Cheer Signal continues to present itself as a gullible victim, totally reliant on the Consultants to carry out a scheme which would lead to listing in Hong Kong.  Any sense of uneasiness of Cheer Signal had allegedly been assuaged by its trust and confidence in Wong (D1) and Ling (D2), the acquisition plan and that the seafood products business had been in operation.  On Deng’s evidence, he and Huang could have no personal benefit from the listing of Cheer Signal.  However, there were many peculiar features in Cheer Signal’s case.

28.  Despite Deng’s express concerns that none of Cheer Signal’s staff had experience in the seafood products business, Cheer Signal nonetheless relied completely on Wong (D1), Ling (D2) and Mak (D3) who had no such experience but solid financial experience.

29.  Even before start of the seafood products business (in the latter half of 2011), Deng already considered that Cheer Signal was taking on significant risk by paying large sums of money in advance without security or guarantee. Cheer Signal nonetheless paid huge consultancy fees of over $300,000 per month to the Consultants, with no guarantee of profits or successful listing.   Allegedly, Cheer Signal was persuaded by Wong (D1) that there should be high volume of turnover first with profits later when the acquisition should take place.

30.  Cheer Signal allegedly had no meetings with representatives of or done due diligence on any of the corporate Defendants, Third Parties and Ying Fai.  Documents were pre-signed by those representatives.  This was despite large sums flowing out of Cheer Signal’s pocket and the ultimate plan to acquire various entities.   As will be demonstrated in the Defendants’ cases below, Cheer Signal had had direct dealings with those representatives.

31.  In late 2011 to early 2012, Cheer Signal ignored findings of close relationship (in terms of directorship, shareholding and shared registered office) amongst Orthodox (D5), Golden Sea (D6), Riches Development (D7) and Ying Fai.  Deng simply “noted with some unease”. Investigation stopped at finding out Astroway (TP1) but not who was behind it.  That conveniently excluded Chan (D4) from Cheer Signal’s scope of knowledge.  The unanswered question was: who was running D6-D9 in the belief of Cheer Signal, or was Cheer Signal simply indifferent, notwithstanding that it might eventually acquire D6-D9?

32.  Further on, in December 2012 (another year later), Cheer Signal once again ignored signs of close relationship between Wong (D1) and Ling (D2). Whilst being “surprised and dissatisfied” that the 2 of them were directors of D8 and D9, Cheer Signal accepted the oral assurance from Wong (D1) and Ling (D2) and a letter dated 8 December 2012 from their solicitors that they had no ownership or control over any of the upstream seller or downstream buyers.  Even if I were to accept Mr Wong SC’s reply submission that Deng had no input to that letter,  the fact remained that Cheer Signal had, once again, gullibly accepted the Consultants’ assurance without due diligence.  Again, it relies on the same reason in paragraph 27 above.

33.  Then Cheer Signal ignored signs of fraud.  It accepted the withdrawal of Ying Fai as a downstream buyer upon vague explanation from Wong (D1).  This was despite direct complaints (in about mid-2012) from Yeung Chi Fai of Ying Fai to Deng that Orthodox (D5), Golden Sea (D6) and the minority shareholders of Ying Fai were forcing him to leave Ying Fai and hand over his management powers; that Mak (D3) was a “spy” planted by Wong (D1) in Cheer Signal and that many transactions between Cheer Signal and Ying Fai were false.  As the documents revealed, the time that Ying Fai fell out coincided with Golden Sea (D6)’s issue of a statutory demand against it (paragraph 41 below).

34.  Huang, who had a prominent role in the seafood products business, gave an affirmation which only purported to confirm the contents in Deng-2^nd but not Deng-1^st.

35.  One simply doubts whether Cheer Signal, with a state-owned enterprise behind it, could have run a multi-million-dollar business, completely relying on 2 consultants’ word, without due diligence on the corporate vehicles they planned to acquire, and without trust documents.

E.  THE DEFENDANTS’ CASES

36.  The Defendants told the story from a different angle. Before the Consultants were engaged, Cheer Signal already operated the Baitenghui Centre (a wholesale fishery products market), apparently for the purpose of rental collection.  ZH Duty Free’s supervising authority (“SASAC”) did not want a joint venture as proposed by the Consultants.  It wanted “quick and big” new businesses independent of Zhuhai Duty Free (Wong (D1)-3^rd, paragraph 47).

37.  They said that it was Huang who originated the idea of setting up an “ABC” Company for Cheer Signal’s seafood products business with its own fish farms and retail network.  The funding model would be similar to that of the wine business.  

38.  Ying Fai was found, which had genuine trading in seafood products, a license to import, fish farms of its own and government permission to build a fish wholesale market in Tai Po.  According to Wong (D1), Cheer Signal (through the ABC Company) would provide $5m deposit and credit facility of HK$50m for seafood trading to Ying Fai, in return for a stake and profits  in Ying Fai.  Ying Fai would open the Tai Po Fish Market within 10 days of the signing of the agreement with Golden Sea (D6).  (The “Ying Fai Mechanism”)

39.  On the instructions of Huang, Chan (D4) acted as a nominee in setting up Golden Sea (D6) as the ABC Company and the corporate vehicles that ran the seafood product business, financed by the Plaintiff’s camp.  Various agreements had been entered into between Golden Sea (D6) and the downstream buyers under the instructions of the Plaintiff’s camp. According to Chan (D4), after its listing, Cheer Signal would formally acquire Golden Sea (D6) from him at a 200% profit margin of company value as his reward.

40.  Mak (D3) was engaged to strengthen Cheer Signal’s finance team.  He claims to be ignorant of any fraudulent scheme.

41.  Ying Fai fell out soon as it repeatedly failed to honour its agreement to properly share the profits or allot shares to Golden Sea (D6) on the due date.  Cheer Signal directed Golden Sea (D6) to petition for the winding-up of Ying Fai (HCCW No. 286 of 2012).  Cheer Signal distanced itself from Ying Fai to avoid Huang and Deng being witnesses.  The petition was dismissed as there were found to be underlying disputes of facts to be tried.

42.  Ying Fai was later replaced by the downstream buyer, Riches Development (D7).  Wong (D1) later found out Joint Big and Wing Sang which dealt with seafood.  Similarly, on the instructions of Huang, Chan (D4) set up D7-D9 and TP2.  The mode of financing D7 was similarly by injection of HK$5m capital to Joint Big.  Riches Development (D7) ceased business on Huang’s instructions, after a marine accident. 

43.  In respect of D8 and D9, the Wing Sang Acquisition Agreement, the Wing Sang Seafood Downstream Buyer Agreement and the Wing Sang Frozen Foods Downstream Buyer Agreement were signed on 20 December 2012.

44.  According to Chan (D4)-3^rd, D7-D9 had genuine operations and real trades but on Cheer Signal’s instructions, formal “trade” documents were drafted to show pre-determined profits to Cheer Signal.  In the course of running D6-D9, the companies ran into deficit.  Huang directed him to cover all the loses and expenses from funds obtained through the “trade” documents.  Naturally, the amounts shown to be payable to Cheer Signal on the face of those documents escalated substantially which could not be met from profits of D6-D9 or funds from Cheer Signal.  Chan (D4) personally provided about HK$10m to keep the operations going.  He was assured by Huang that listing would be completed by 2014 and that Chan (D4)’s contributions would be taken into account in computing the consideration for the acquisition.

45.  The business came to a halt due to internal power struggle in the Plaintiff’s camp, causing Huang to be ousted.

46.  Central to Cheer Signal’s case was its ignorance of the fraud and Chan (D4)’s existence.  The Defendants allege that Cheer Signal has failed to disclose material Information and, worse still, misled the ex parte judge into believing that Cheer Signal was a victim.  The alleged material non-disclosure was in the following aspects:

(1) Cheer Signal proposed and actively engaged itself in the seafood products business;

(2) Cheer Signal feigned ignorance of Chan (D4);

(3) Cheer Signal had had direct dealings with Ying Fai and Golden Sea (D6);

(4) There appeared to be a principal-nominee relationship between Cheer Signal and Golden Sea (D6);

(5) The mode of running D7-D9.

(6) ZH Duty Free represented to the outside world that the Defendant entities were part of its family;

(7) Post-October 2014 correspondence between the Plaintiff’s camp and the Consultants was inconsistent with Cheer Signal’s ignorance of the Fraudulent Scheme;

(8) With regard to Mak (D3), Cheer Signal has failed to disclose the circumstances leading to his employment and the internal control procedures in a typical seafood products transaction; there was no compelling evidence to infer fraud against him;

(9) With regard to Chan (D4), Cheer Signal failed to disclose that he had arranged for payment of HK$8.6 million to Cheer Signal after the termination of the business.

F.  MATERIAL NON-DISCLOSURE

47.  Whilst an applicant for an ex parte Mareva injunction needs to make full and frank disclosure to the court, he cannot be expected to know the defence with hindsight: Sino Wood Investment Ltd v Wong Kam Yin, HCA 307/2002, 23 December 2002, at §24, Deputy Judge A Cheung (as he then was).

48.  Where the alleged subject matters of material non-disclosure are hotly disputed by the plaintiff, the court should not and could not conduct a mini-trial to decide which party’s story is inherently more credible.  Whether or not a plaintiff has made full and frank disclosure in obtaining an ex parte Mareva injunction should be investigated at the trial: Sino Wood Investment Ltd v Wong Kam Yin, at §§27-28.

49.  No doubt, on the Defendants’ case, Cheer Signal has not disclosed documents or information which the Defendants consider to be material.  However, that was due to different explanations for many underlying matters given by the parties. There was no pre-action correspondence setting out the Defendants’ case.  Looking at things at the ex parte stage, it would have been impossible for Cheer Signal to anticipate a defence which in its eyes is concoction.

50.  Moreover, the defences are hotly disputed by Cheer Signal on many aspects, big and small.  There is a mass of documents (14 bundles with 4,000 pages) to support the allegations and cross-allegations.  Even a document could be read both ways by the Consultants and Cheer Signal respectively. Discovery is complete and each party’s version has not yet been tested by cross-examination.  It is simply impossible to resolve all disputes in this decision.  Subject to the next paragraph, whether Cheer Signal was guilty of material non-disclosure is best left to the trial.

51.  There was one item of non-disclosure (paragraph 46(9) above).  Deng stated that the downstream buyers had made no repayment since 3 September 2013, the day of cessation of funding from Cheer Signal (§91 of Deng-1^st). In fact, there is documentary proof that Chan (D4) had arranged for repayments totalling about HK$8.6m to Cheer Signal.  That non-disclosure was material in reinforcing the participation of the downstream buyers in the fraud.  Mr Wong SC has nevertheless shown that Cheer Signal had purportedly taken that amount into account when claiming for the total sum of $127m in the writ.  After that HK$8.6m, there had been no further payment by the downstream buyers.  This one item of material non-disclosure, though indisputable, was not sufficient in itself to discharge the Mareva injunction.

52.  I take the alternative course of weighing paragraph 46 above as grounds in support of the discharge of the Mareva injunction.

F1.  Cheer Signal proposed and actively engaged itself in the seafood products business

53.  There was dispute as to who proposed or expanded the idea of running a seafood products business.  After the Consultants were appointed, ZH Duty Free was involved in an iterative process and vetted Orthodox’s draft reports, although changes that ZH Duty Free made seemed to be cosmetic.  (See email from ZH Duty Free’s Vice General Manager Liang Huiping (“Liang”) to Wong (D1) on 15 December 2012.)

54.  Deng purported to show that the idea of a seafood products business came from Wong (D1) and Ling (D2).  (In paragraph 28 of his submission, Mr Wong SC referred to the Orthodox (D5) Consultancy Report 2011 and a number of other documents.)  At this stage, the evidence is not conclusive.  Even if Cheer Signal had initiated the idea of a seafood products business, that was not the same as approval of the fraud that emerged.  I place little weight on this item.

F2.  Cheer Signal’s feigned ignorance of Chan (D4)

55.  Chan (D4) played a critical role in setting up D6 to D9, TP1 and TP2 on the instructions of Huang and managing the business.

56.  Cheer Signal admits knowledge that D6 to D9 were ultimately held and/or controlled by Astroway (TP1).  It asserts that it was only upon investigation by its solicitors and the police that it was discovered that Chan (D4) was the husband of Wong (D1), that he had signed the corporate documents of D6 to D9 on behalf of TP1, and that he was the common bank signatory of D6-D9. Implicit in these assertions was that until such investigation, Cheer Signal did not know of Chan (D4).

57.  The Defendants’ evidence shows, to the contrary, that Chan (D4) had had direct contact with ZH Duty Free’s top officials (Deng, Ms Huang Yanping and Liang Huiping) as far back as 2010.  There were discussions about opening a dessert shop and plastic materials factory, which did not materialize, but there was a wine business that had run for a short while.  Orthodox (D5) was not involved in it.

58.  The setting up of this wine business was very similar to that of the seafood products business.  The idea of a joint venture was rejected by the Plaintiff’s camp.  Eventually, Chan (D4) as nominee set up a Jinmao Hang Co Ltd in November 2010.  Cheer Signal funded it by making pre-paid purchases and would eventually buy up the wine business with a handsome fee by way of high premium in the acquisition.  Chan (D4) and another would report to the Plaintiff’s camp. 

59.  The skilful drafting of §58 of Deng-2^nd denied recollection of anyone called Chan (D4) but not the evidence concerning the proposed dessert business and plastic materials business.  Ms Huang Yanping and Liang Huiping did not file any affirmation to deny Chan (D4)’s version.

60.  Nor did Cheer Signal deny the existence of the wine business although it claimed that it involved Mak (D3) and not Chan (D4).  See Cheer Signal’s explanatory memorandum to the police as to the fraud dated 3 February 2015 (“the memorandum to police”).

61.  In fact, in the memorandum to the police, it was stated that for the seafood products business, regardless of whether the upstream seller or downstream buyers had profits, there would be guaranteed profits for Cheer Signal at 30% of the gross profits for each sale and purchase. It lent some weight to Chan (D4)’s case of pre-determined profits and sham “trade” documents.

62.  The continuous involvement of Chan (D4) with the Plaintiff's camp since 2010 would have undermined Cheer Signal’s alleged ignorance of the Fraudulent Scheme, particularly since the wine business started less than a year before the seafood products business.   It would also have explained why Cheer Signal did not do due diligence of the Chan (D4) entities.

F3.  Cheer Signal had directly dealt with Ying Fai

63.  Before the Ying Fai Mechanism was set up, Orthodox (D5) had asked the Plaintiff’s camp to comment on a draft Letter of Intent to be signed among Cheer Signal, Orthodox (D5) and Ying Fai (“the draft LOI”).  See email dated 26 November 2010 and fax dated 25 February 2011, both from Orthodox (D5) to Fong Zhanxiong of ZH Duty Free.

64.  The draft LOI suggested marrying the seafood products business of Cheer Signal and Orthodox (D5) with that of Ying Fai. The scope of cooperation covered Ying Fai’s business in East Timor and Tai Po.  The draft LOI stated that Cheer Signal and Orthodox (D5) wished to “through the model of investment cooperation, participate in [Ying Fai’s] seafood development project” and that Cheer Signal and Orthodox (D5) were willing to “provide capital” for a “joint development project”. 

65.  Ying Fai’s majority shareholder Mr Yeung Chi Fai sent a letter to Huang on 7 April 2011 insisting on details of cooperation to be set out in written agreements and followed up by professional teams. Deng signed a letter dated 1 June 2011 authorizing Orthodox (D5) to negotiate with Ying Fai.

66.  Cheer Signal has not denied the existence of these documents. All that Deng said was that these documents had to be tested in cross-examination, claiming that the Defendants had not even adduced evidence to prove that all these documents were transmitted to Cheer Signal or Huang.  This was most evasive.  These documents flatly contradicted Cheer Signal’s assertion that it regarded Ying Fai as a true downstream buyer, or that it left everything to the Consultants.

F4.  There appeared to be a principal-nominee relationship between Cheer Signal and Golden Sea (D6)

67.  It appeared that Golden Sea (D6), as nominee of Cheer Signal, carried out the terms of the draft LOI and set up the Ying Fai Mechanism:

(a) A Cooperation Agreement dated 19 August 2011 between Cheer Signal and Golden Sea (the “Cooperation Memorandum”), which Cheer Signal has not produced;

(b) A Trading Cooperation Agreement dated 23 August 2011 between Golden Sea and Ying Fai (the “Ying Fai Cooperation Agreement”) ;

68.  The Cooperation Memorandum was signed by Deng, stating that Cheer Signal: (a) “authorized [Golden Sea (D6)] together with Ying Fai to organize a seafood products logistics and supply chain”; (b) “authorized [Golden Sea (D6)] to handle relevant purchase orders, payment terms, invoices, quality, verification etc …”; and (c) required Golden Sea (D6) to “handle the above trade matters properly and generate profits for the seafood products trade”. 

69.  The Ying Fai Cooperation Agreement was signed on the same day as the so-called Golden Sea Upstream Supply Agreement and Ying Fai Downstream Buyer Agreement and recorded in detail the true arrangements among Cheer Signal, Golden Sea, and Ying Fai. The preamble used the same wording as in the draft LOI. These provisions supported the Defendants’ case that the upstream and downstream agreements were only a façade to facilitate the financing of the real seafood products business through Golden Sea (D6) and Ying Fai.

70.  Moreover, Clause 2(B) of the Ying Fai Cooperation Agreement stated that Golden Sea had to produce bank proof of HK$50 million of funds. Cheer Signal apparently did so by a Bank Confirmation Letter dated 17 August 2011 confirming the balance in its account name to be HK$59.7m, although it did not expressly mention Ying Fai.

71.  Further, Clause 2(B)(1) of the Ying Fai Cooperation Agreement required Ying Fai to open a fish wholesale market in Tai Po, Hong Kong, within 10 days, which Ying Fai did on 31 August 2011.  ZH Duty Free apparently co-hosted the opening ceremony with Ying Fai.  (See the draft invitation that Wong (D1) sent to Liang of ZH Duty Free and draft speech of Huang that Ling (D2) sent to Liang for comment.)

72.  These documents showed the relationship among Cheer Signal, Golden Sea and Ying Fai to be more than that of sellers and buyers.  It was impossible that the Plaintiff’s camp had not seen representatives of Ying Fai.

73.  Further, by an email to Huang on 22 August 2011, Wong (D1) reported on the incorporation of Golden Sea (D6).  She explained that its nominee shareholder was Fung, Yu & Co. CPA Ltd, and that Fung Yu & Co could legally “fully execute company decisions, including to appoint Orthodox as director and decide or manage”.  Such explanation was apparently to assure Huang that Golden Sea would remain a nominee in holding the seafood product business.

F5.  The mode of running D7-D9

74.  The mode of running D7-D9 has been set out in paragraphs 42-43 above.  There was no dispute that representatives of the Plaintiff’s camp (including Deng) and SASAC visited the fish farm of Riches Development (D7) in about September 2012, although Deng now claims that the representatives believed they were seeing the facilities of an independent downstream buyer.

75.  Likewise, the Plaintiff’s camp attended D8’s opening ceremony and participated in an Asian seafood expo as D8’s business partner, sharing as much as 50% of the expo costs.  Huang led the delegation. Deng explained that it was a gesture of goodwill to help a valuable business partner whom Cheer Signal would be purchasing from.

76.  According to Wong (D1), she and Ling (D2) were asked by Huang to be directors of D8 and D9 and they did so from 5 November 2012 to 2 September 2013.  When Deng informed them of a power struggle within Zhuhai Duty Free and their directorship being a point that Huang’s enemies used against Huang, at Deng’s suggestion, Wong (D1) and Ling (D2) issued the solicitors letter dated 8 December 2012 (paragraph 32 above).

F6.  ZH Duty Free represented to the outside world that the Defendant entities were part of its family

77.  When representatives of an international frozen seafood supplier (“Oceanfresh”) visited Hong Kong and Zhuhai between 24 and 26 October 2012, the Plaintiff's camp arranged ferry tickets, hotel rooms and hosted dinners for them.  Meetings took place at its office, apparently without the presence of Golden Sea (D6).

78.  Zhuhai Duty Free made a presentation to Oceanfresh, referring to Golden Sea (D6) as the “sole seafood partner company” with Cheer Signal and the 2 as having a “strategic cooperation”. Moreover, ZH Duty Free included all of Golden Sea (D6), D7-D9 as it own.

79.  Oceanfresh later signed Letters of Intent and Distributorship Agreement with Golden Sea (D6) but it was Cheer Signal which stated in its press release that “Oceanfresh of South Africa is an important partner of ours”.  That press release appeared in the website of ZH Duty Free. 

80.  These were all documented. Cheer Signal neither disputed nor provided any explanation to the documents or the Oceanfresh visit.

81.  In the materials that it supplied to the securities firm in about August 2013 for the purpose of listing, Cheer Signal described the seafood products business as including the Wing Sang entities and Oceanfresh agreements with Golden Sea (D6) as Cheer Signal’s own.

82.  Cheer Signal asserts that these must be considered against Orthodox (D5)’s advice that the banks would consider the strength of the suppliers in deciding the credit facility to grant to Cheer Signal: Orthodox (D5) Report for 2012, at p 19. With respect, there was a distinction in regarding an entity as one’s supplier and as one’s own.

F7.  Post October 2014 correspondence between the Plaintiff’s camp and the Consultants was inconsistent with Cheer Signal’Ignorance  

83.  When the downstream buyers ceased settling payments, Cheer Signal pressed Wong (D1) to help secure settlement.  “Wong replied that, on her understanding, it was because of the decision of Cheer Signal to withhold payments to Golden Sea (D6) that the downstream buyers (D7-D9) had encountered major financial difficulties.”  Deng claimed not to understand Wong (D1)’s explanation but did not press further because he still trusted her to fix things.

84.  The minutes of this meeting on 16 September 2013 recorded Wong (D1) to have said these against Cheer Signal:

“Cheer Signal’s sudden ceasing of business settlement is hard to understand. Now the ‘4’ companies have big financial difficulty and cannot pay Cheer Signal. The reason is that funds received from Cheer Signal were for ordering goods and daily operations, the ordered goods would arrive in Hong Kong in batches, now the goods are arriving without funds to pay, the breaking of the capital chain will cause extremely big knock-on risks. The consultants have all along responsibly and confidently managed the seafood business, and will coordinate the operations of Wing Sang etc …”

85.  In an email on 2 January 2014, Wong (D1) reminded Deng that it was all Cheer Signal’s own doing; the downstream buyers were unable to settle with Cheer Signal because Cheer Signal had suddenly ceased the seafood products business.

86.  Wong (D1) was blaming Cheer Signal and yet the latter rewarded such accusation with a further year of consultancy contract.

87.  Cheer Signal reported to the police in October 2014.  However, in a series of emails in the ensuing 4 months up to 25 February 2015 (almost on a weekly basis), the accountant of ZH Duty Free kept asking for the favour of Wong (D1) to help in fending off investigations from the supervisory authority.  Whilst the amount now claimed is in the region of HK$127m, those emails pleaded for the help of Orthodox (D5) to achieve a “target” of $20 million by the end of 2014.  Huang and Deng and other superiors featured frequently in these emails.  The tone was wholly inconsistent with the Plaintiff's camp being a victim who took care not to alert the fraudsters. 

88.  Chan (D4) suggests that Cheer Signal turned against the Defendants due to an internal power struggle within ZH Duty Free which led to the replacement of Huang by 2 officials.  Cheer Signal of course denies this but there is some documentary evidence of Huang having stepped down as General Manager of Zhuhai Duty Free in December 2012 and as Chairman, director and legal representative in the first quarter of 2015 before this writ was issued.

F8.  Failure to disclose the circumstances leading to Mak (D3)’s employment and the internal control procedures in a typical seafood products transaction

89.  Cheer Signal asserts that Mak (D3) was “planted” by Wong (D1) and Ling (D2).  Its case against Mak (D3), as admitted in the submission of Mr Wong SC, was based on inference, namely that (1) he knew that all underlying transactions of the seafood products business were fictitious, and (2) he was involved in creating documents to give a false appearance of genuineness.

90.  Given that all other Defendants now admit that the seafood products business contained at least some sham transactions, Mr Wong SC submits that Mak (D3)’s complete silence as to whether or not the seafood products transactions were genuine and failure to address the anamolies identified by Cheer Signal cast in doubt Mak (D3)’s claimed ignorance of the Fraudulent Scheme.

91.  Cogent evidence is required before evidence is considered sufficient to raise a case of serious misconduct. The rationale is that:-

“… the more serious the allegation the less likely it is that the event occurred and, hence, the stronger should be the evidence before the court concludes that the allegation is established on the balance of probability. Fraud is usually less likely than negligence …”. Nina Kung v Wong Din Shin (2005) 8 HKCFAR 387, at §§181-184

92.  If the court is invited to draw an inference of fraud on the basis of circumstantial evidence, any such inference can only be drawn where it is compelling.  It is not permissible merely to choose what might be considered to be the more likely of two guesses if neither is properly justified by the primary facts found. Nor can it be reached by conjecture: Nina Kung, at §§185-187.

93.  Mak (D3) had had experience in finance but not fishery business before he was employed by Cheer Signal.  He had attended 3 rounds of job interviews – with Deng, the director of Human Resources and Huang.  He had to undergo 3 months’ probation. 

94.  Article 2 of Cheer Signal’s Rules required Mak (D3) to assist the President and he had in fact been told to assist Deng.  There was no document suggesting that Mak (D3) was to assist or did assist the Consultants.

95.  Besides, there was no proof of Mak (D3)’s knowledge of the Fraudulent Scheme.  The most “direct” piece of evidence implicating him was a document called 水產項目流程 (“Fishery Project Flowchart”) which Cheer Signal had allegedly never seen, and was the only document that purportedly suggested the existence of the Ying Fai Mechanism.  It was sent to Mak (D3)’s email address ray@bankerplus.com when he was with Orthodox (D5).  That was on 15 April 2011, about 2 weeks before he becamed employed by Cheer Signal.  Mr Wong SC submits that it showed Mak (D3) to be part of the pre-meditated Fraudulent Scheme.

96.  However, even on Cheer Signal’s case, it was only in June 2011 that Orthodox (D5) proposed that Cheer Signal could act as a middleman of seafood products and concrete arrangements came up in August 2011. Before that, there was only a proposal for Cheer Signal to enter into a joint venture, which received lukewarm response from the Plaintiff’s camp.  There appeared to be no fraudulent scheme that Mak (D3) had to perpetrate in at the time of commencement of employment.

97.  Further, there was no evidence that Mak (D3) participated in any discussions between the Plaintiff’s camp and the Consultants; or amongst Cheer Signal and/or D6 to D9.  There was no evidence (not even an email) that the Consultants assisted or oversaw his handling of the seafood products business.  

98.  Mak (D3) has set out the internal control system of Cheer Signal, which was not disputed by Deng.  In general, a transaction had to be processed by at least 4 levels of personnel in Cheer Signal apart from Mak (D3): (a) a junior clerk Yang Shu Wei to prepare purchase orders to Golden Sea (D6) and sales invoices to the downstream buyer; Mak (D3) would verify and calculate the profit margin; (b) the accounts team would verify the documents and prepare cheques for payment to Golden Sea (D6); (c) Deng would sign the cheques; and (d) an accounting staff would deliver to ZH Duty Free the cheques and corresponding documents to ZH Duty Free for approval and counter-signing by Huang or Liang.

99.  Transactions involving over $2,000,000 required approval of 8 senior staff members from Zhuhai Duty Free and SASAC.  On top of these, Articles 6.3 to 6.3.4 of Cheer Signal’s Rules provided for a standard procedure to verify and approve payments. 

100.  Cheer Signal accuses Mak (D3) who oversaw preparation of transaction documents, for failure to spot anomalies therein, eg the use of recycled photos and significant internal inconsistencies as to products inspected and the site visit dates.  Some anomalies were not identified (Deng-1^st, §113(c)).  B3/641 referred to site inspection of the seafood product business when Mak (D3) was present on 13 December 2012 at the Kwun Tong wholesale fish market.  Deng was also present.  If Mak had created an anomaly, Deng was party to it.

101.  Given so many staff members involved in the internal system, merely relying on the anomalies in reports would hardly give rise to a compelling inference that Mak (D3) was involved in the Fraudulent Scheme.  Otherwise, the same inference could well be drawn against Huang, Deng or Liang who approved the transactions.

102.  It was Deng’s evidence that if Yang Shu Wei spotted an obvious typo in the transaction documents, he would inform Orthodox (D5), as evidenced by a chain of email correspondence.  Mak (D3) was not in the email loop of Orthodox (D5).  There was no explanation from Cheer Signal as to why Yang would not contact D6-D9 if Cheer Signal did not know about the Fraudulent Scheme.

103.  What causes me concern is, however, that the purchase orders of Riches Development (D7) showed contact details identical to Golden Sea (D6).  Mak (D3) fails to explain this phenomenon, despite other defendants’ acceptance that there were some sham documentation/ transactions. This lends support to Cheer Signal’s suggestion that he was the one who prepared transaction documents for both the upstream seller and the downstream buyers in perpetration of the Fraudulent Scheme.

104.  In summary, the Defendants’ cases are that “Huang and Deng instructed us to do what we did”; “the documents did not mean what they said”.  The Defendants have shown that ZH Duty Free had met Chan (D4), representatives of Ying Fai, Joint Big, Wing Sang and Oceanfresh.  ZH Duty Free did not just blindly sign pre-signed documents at least in relation to Ying Fai.  It treated Golden Sea as its nominee.  It also represented to outsiders such as Oceanfresh and the securities firm for listing that the upstream seller and the downstream buyers were all part of ZH Duty Free’s.  The Defendants have also asserted a similar mode of financing with the prior wine business, Ying Fai and Riches Development (D7). 

105.  The cases of the Defendants are not free from difficulties, though.  There were no instruments of trust between the Plaintiff’s camp and any of the Defendants.  There appeared to be no restrictions imposed by SASAC and/or ZH Duty Free that forbade Cheer Signal from investing into joint ventures.  The business scheme would have prevented the monies “invested” by the plaintiff’s camp to grow and develop as they had to be “repaid” after the credit period. As Chan (D4) says, it was impossible to generate more than 100% return within 30 days.

106.  Further, between Deng and Wong (D1), there should have been nothing to hide.  And yet in the one-to-one correspondence (DWP‑44 and DWP-50) from September 2013 to mid-2014 and even in the face of demand letters, Wong (D1) made no reference to the “true” arrangement between the parties as the Defendants now allege.  To the contrary, when Deng asked for bank documents as to credit position.  Wong (D1) refused, saying that Cheer Signal was not a shareholder but only trade investor and had no right to interfere with management of trading companies.  There was no response by Golden Sea (D6) to Cheer Signal’s demand letter.

107.  Similarly, Chan (D4) has not produced any direct correspondence or evidence of accounting between him, and Huang and Deng, whether in relation to the wine or seafood products business.   There was no evidence of the promise to pay him bonus upon the acquisition.

108.  Moreoever, Chan (D4) has advanced an inconsistent case on affirmation (“Chan (D4)’s inconsistent case”). Initially, his 1^st and 2^nd affirmations (for disclosure of assets) stated that he was 100% beneficial shareholder of D6-D9 and TP1 to TP3.  In Chan (D4)-3rd, he claimed to indirectly hold 100% interest in those entities (but not TP3) as nominee for Cheer Signal.  Such inconsistencies spoke of dishonesty and even concoction of defence.  I note, however, that there is no evidence of the Consultants and Mak (D3) joining in asserting these inconsistent cases.

G.  FINDINGS ON GOOD ARGUABLE CASE

109.  Having weighed the strength and weakness of each side’s version, I find that both sides have only presented half truths.  I share the observations of L Chan J.  There are inherent doubts in Cheer Signal’s case on the Fraudulent Scheme.  The Defendants’ cases give a “seriously different flavor to it: Commercial Injunctions, at §9.007, citing Dubai-Bank v Galadari [1990] 1 Lloyd’s Rep 120, at 127 column 2,per Dillon LJ.  It is not a situation of the Defendants nitpicking of a few lines of a class of carefully selected documents and putting a strained interpretation on it, as suggested by Mr Wong SC.

110.  I disagree with Mr. Laurence Li that Cheer Signal has no case against the Consultants.  Subject to what I have to say about the Chan (D4) camp and TP3 below, I find that Cheer Signal can only show an arguable case of fraud but cannot meet the threshold for a Mareva injunction against the Consultants, Mak (D3) and Chan (D4).

111.  The case against entities in the Chan (D4) camp is different.  On Chan (D4)’s latest version, as nominal holder, there is a good arguable case of constructive trust against those entities (except TP3 discussed in paragraphs 121-124 below).  He would have a duty to account to Cheer Signal anyway, although the question of whether Cheer Signal had been “defrauded” remains.

H.  RISK OF DISSIPATION OF ASSETS

112.  There is no requirement to prove nefarious intent per se.  “The test is whether, on the assumption that the plaintiff has shown at least a ‘good arguable case’, the court concludes, on the whole of the evidence then before it, that the refusal of a Mareva injunction would involve a real risk that a judgment or award in favour of the plaintiff would remain unsatisfied.” see Kerr LJ in The Niedersachsen, at 419h.

113.  Evidence of an unacceptably low standard of commercial morality or questionable integrity, particularly in connection with the transaction in question and after disputes have arisen, will entitle the court to conclude that there is a sufficient risk to justify a Mareva injunction: Honsaico Trading Co Ltd v Hong Yiah Seng Co Ltd, [1990] 1 HKLR 235 at para 24; Standard Chartered Securities Ltd v Lai Arthur & ors [1993] 1 HKC 375, at 394.

114.  However, the Court should scrutinize the evidence with care and should not too readily infer such a risk from the defendant’s conduct or commercial morality: Hornor Resources (International) Co Ltd v Savvy Resources Ltd [2010] 4 HKC 50, at §27, Chu J (as she then was); Thane Investments Limited v Tomlinson [2003] EWCA Civ 1272 at §28.

115.  Cheer Signal has not produced evidence of actual dissipation of assets but only invites the court to draw the inference of risk of dissipation.  Any dishonesty or low commercial morality that the Defendants had in participating in the fraudulent scheme was, on the Defendants’ case, on the instructions of Huang and Deng, and purportedly for the benefit of Cheer Signal.  The dishonesty and low commercial morality in the context of this case was not, in my view, the decisive factor in inferring a risk of dissipation.

116.  After Cheer Signal terminated the seafood products business, it had kept pressing Wong (D1) to demand for repayment from the downstream buyers.  Deng specifically told her that the downstream buyers owed HK$40m for 9-23 September 2013 and that the Consultants should compile a full report on the whereabouts of the funds which Cheer Signal had transferred to Golden Sea (D6) for reference of SASAC.  In October 2013, Deng even asked Wong (D1) to enquire if Orthodox (D5) could provide proof of delivery of the seafood products.  It would have been clear to the Defendants (if they had been fraudsters) that the game was up.  Despite all these, there was no proof of the Defendants having dissipated assets or evaded process.

117.  The case against Mak (D3) was weakest.  There has been a lapse of 19 months from his resignation to the time of the ex parte application.  He has had a stable career, with more than 15 years of experience in the banking industry. He is now employed in Hong Kong, with no apparent nexus with other defendants. There is nothing to suggest that he has done anything to avoid judgment against him.  I find no risk of dissipation against him.

118.  As for Chan (D4), shortly before Cheer Signal issued a letter to suspend the seafood product business, he had arranged for about HK$8.6 million to be paid to Cheer Signal.  He mortgaged his property in February 2014 to fund TP3.  He obtained a 2‑year Licence to Culture Marine Fishing for TP3 on 24 March 2014. He has maintained his business of running chain restaurants in Hong Kong.  Rather than dissipating assets, he seems to be building up business.  Chan (D4) owns a number of companies for investment purpose but there is nothing to show that Chan (D4) has diverted funds or business from any of D6-D9 in the past to the other entities in which he had interest.

119.  The more alarming feature was how his camp could have incurred a deficit position of $120m in a scheme involving circular routing of Cheer Signal’s money.  Chan (D4) has purportedly given an account of that money.  Exhibit CPF‑51 was a segment of the supporting documents.  Mr Anson Wong SC challenges the relevance of that segment as it concerned transactions in the period before D8 and D9 signed the written agreements on 20 December 2012.  However, Chan (D4) has already made clear that there were time constraints to collate the voluminous documents: §81 of Chan (D4)-3^rd. Any incomplete account should not be held against him at this stage. 

120.  What causes me concern, rather, is Chan (D4)’s inconsistent case.  He gave no explanation for the inconsistency.  Nor had he explained why he had to transfer a total of about $4.36 million from his own account to D8 between 16 September and 4 October 2013. 

121.  Moreover, Chan (D4) was used to managing the web of D6-D9, TP1 and TP2.  TP3 has been acquired by Chan (D4) since January 2013 but allegedly never used for Cheer Signal.  He now allegedly owns TP3, using a name similar to that of D8‑D9 to “continue” to conduct seafood trading business.  D6-D9 appear to be in a deficit position whereas TP3 has substantial credit balance.  There is a risk that he has treated the more profitable TP3 as his own to the exclusion of Cheer Signal.  

122.  The matters in the 2 preceding paragraphs are additional to the low commercial morality in participation in the seafood products business.  Arguably, there is risk of dissipation shown in respect of D6-D9, TP1 to TP3.

I.  CASE AGAINST THIRD PARTIES

123.  A Mareva injunction can be extended under the Chabra jurisdiction to a third party against whom the plaintiff does not have any existing cause of action: Akai Holdings Ltd v Ho Wing On Christopher, HCMP 1718, 1720 & 1722/2009, 24 September 2009, Tang VP at §§46:

(a) The court should be concerned with whether there is good reason to suppose that the assets of the third party are, in truth, the assets of the injuncted defendant, eg on bare trust for the plaintiff.

(b) The jurisdiction can be exercised even if the relevant defendant to the substantive claim has no legal or equitable right to the assets in question.  The important issue is a question of substantive control, and whether the defendant has some right in respect of, or control over, or other rights of access to, the assets.

(c) If a network of trusts and companies has been set up by a defendant to hold assets over which that defendant has control and this has, apparently, been done to make himself judgment-proof, then such would be an appropriate case for the granting of freezing relief against a relevant non-party.

124.  The statement of claim makes no claim against the third parties.  Chan (D4) was used to manage a network of companies for Cheer Signal.  TP3 was acquired before termination of the seafood products business.  It was not clear when he had started using TP3.  There was only his word that he that had never used TP3 for Cheer Signal’ business.  The documentary proof shows that he obtained banking facilities on mortgage of his property in February 2014 (after termination of the seafood products business).  Whether it was to make himself judgment proof or to set up an independent business was equally possible.

J.  Balance of convenience

Delay

125.  Delay may reflect the lack of irreparable damage.  It may cause prejudice to the Defendants if they have altered their positions in the intervening period.  It must not just be shown that the applicant has delayed unreasonably but that because of the delay, it would be unreasonable to grant the remedy; that it had become practically unjust to do so: Abbot GmbH & Co KG v Pharmareg Consulting Co Ltd [2009] 3 HKLRD 524, at 541-544, §80-95, Sakhrani J; Taihan Electric Wire Company Ltd v Lee Chi Yuen Arctic & others, HCA 454 of 2013, 1 November 2013, §94.

126.  I have alluded to the signs of fraud and Cheer Signal’s knowledge of the close relationship between Wong (D1) and Ling (D2) with the corporate vehicles, latest by December 2012 (paragraphs 31 and 32 above). In the letter of their solicitors to the police dated 20 October 2014, Cheer Signal has already set out what they thought was a case of conspiracy to defraud.  Waiting for the outcome of the police investigation principally assisted Cheer Signal in allegedly discovering the role of Chan (D4), which I have doubted.  In the same month, Cheer Signal had already, through its solicitors, issued a demand letter to the Consultants setting out a suspected case of conspiracy to defraud.

127.  Cheer Signal’s own investigation was from October 2014 to March 2015.  The additional “discovery” was the exact relationship between the corporate Defendants; that they lacked presence at the registered offices and that Chan (D4) was the common signatory of Golden Sea (D6) and the downstream buyers.  That was not something requiring 6 months to ascertain.  Another additional “discovery” was the anomalies in documents (of 2011-2013) now attributed to Mak (D3).  Why it had taken Cheer Signal 6 months to do such investigation was yet to be explained but there was no bar to their suing the other Defendants in the meantime.

128.  Latest by October 2014, Cheer Signal “discovered” a judgment dated 29 August 2013 in HCCW286/2012 between Ying Fai and Golden Sea (D6) in which the 2 entities accepted that there had never been any trade of actual seafood products among them and Cheer Signal.  However, Cheer Signal delayed for another 8 months from that judgment until April 2015 to institute the present action.

129.  I find that, even on Cheer Signal’s case, there has been unreasonable delay in seeking the Mareva injunction except in relation to Mak (D3).  Cheer Signal had drawn the delay to the ex parte judge’s attention: §24 of the skeleton submission at the ex parte stage.  The ex parte order will stand.  The Consultants and Mak (D3) will not be affected as Cheer Signal could not cross the threshold of a good arguable case shown against them.

130.  However, in relation to Chan (D4), the delay has affected him.  For the obvious reason that Cheer Signal denied knowing him, there had been no demand letter to Chan (D4).  He has been injecting his own assets and running TP3 for over a year (counting from February 2014, after termination of the seafood products business) when the Mareva injunction was applied for.  It would not be just to freeze the assets of TP3 after such delay.

Adequacy of damages as a remedy

131.  Cheer Signal’s loss can clearly be compensated for by damages.  On the other hand, the freezing of assets of the personal Defendants would cause great inconvenience to them.  I cannot see any prejudice to D6-9, TP1 and TP2 if a Mareva injunction is granted since they were (on Chan (D4)’s admission) held on behalf of Cheer Signal.  Freezing the assets of TP3 would of course affect the business and damages would be more difficult to quantify for loss of business than the claim of Cheer Signal.

Summary on application for continuation/discharge of the Mareva Injunction

132.  Each side’s version was but half truth.  In respect of the Consultants, there is an arguable case of fraud but the question of whether Cheer Signal knew about it remains.  There is no evidence of risk of dissipation of assets.  Cheer Signal has delayed in coming to court although there is no prejudice allegedly suffered by the Consultants.  I decline to continue the injunction against them.

133.  In respect of Mak (D3), there is an arguable case of fraud but the question of whether Cheer Signal knew about the fraud remains.  There is no evidence of risk of dissipation of assets.  There has been no delay in coming to court.  I decline to continue the injunction against him.

134.  In respect of Chan (D4), there is an arguable case of fraud against him.  On his own admission, there is a good arguable case of constructive trust against entities (except TP3) within his camp. There is evidence of risk of dissipation of assets but also of building up business. Cheer Signal has delayed in coming to court and there is prejudice to Chan (D4) who has run TP3 for over a year before the grant of the interim Mareva injunction.  Balancing all factors, I decline to grant the Mareva injunction against Chan (D4) and TP3, but continue it only against D6-D9, TP1 and TP2.

K.  SUMMONS TO ARGUE THAT THE INJUNCTION WAS PROPRIETARY IN NATURE

135.  The summons seeks variation so as to remove from the Mareva injunction order provisions for weekly ordinary living expenses and one-off sums for each of the Defendants and TPs to seek legal advice.  Cheer Signal contends that the injunction is proprietary in nature.

136.  A proprietary injunction is to preserve assets which a claimant has a proprietary claim over so that they can be turned over to the claimant if he is successful in the action.  It  is easier to obtain and not subject to the usual liberties inserted into Mareva relief and there is no need to prove risk of dissipation: Zimmer Sweden AB v KPN Hong Kong Ltd v anor, HCA 2264/2013, 2 May 2014, at §77, per DHCJ Yee.

137.  The proprietary claim is simply inconsistent with Cheer Signal’s belief that there had been genuine trading.  At the ex parte hearing, the writ and the case advanced was for damages for fraud.  Cheer Signal has not changed its position when different Defendants sought to vary the terms of the Mareva injunction before this hearing.  Its earliest indication of arguing for a proprietary injunction was on 12 August 2015 in Deng-2^nd (a reply affirmation).   

138.  Lateness aside, in a situation of fraudulent misrepresentation, it is at least arguable that the stolen moneys are traceable in equity and equity imposes a constructive trust on the fraudulent recipient: Zimmer Sweden AB v KPN Hong Kong Ltd v anor, at §89-93.  This is now the position in prayers (1) to (3) of the statement of claim.

139.  Despite those prayers, Cheer Signal has not identified any asset of the Consultants that was traceable to the $7.41m fees they received.  The Consultants have provided, eg proposals on business models, presentation to Oceanfresh, visit to fish farms etc.  It cannot be suggested that they had failed to provide any consideration for those fees.  The rest of the monies (HK$120m) was given to Golden Sea (D6) (§39, statement of claim) and there was no evidence of receipt by the Consultants. The claim against them could hardly be proprietary in nature.

140.  Similarly, there cannot be a tracing claim against Mak (D3) as it was not alleged that he had received any part of the $127m. 

141.  The injunction against Chan (D4), D6-D9 and the TPs cannot be proprietary in nature either.  Cheer Signal has not accepted that D6-D9 and the TPs were its companies and believed that its money was for genuine trading.  Chan (D4)’s evidence is that there had been genuine trading. The evidence clearly shows funds of Chan (D4) to be paid into, at least, D8 and TP3.

142.  This summons is dismissed.

L.  Conclusion

143.  I order as follows:

(1) Re Cheer Signal’s summons for continuation and Defendants’ summons for discharge:

(a) The Mareva injunction be discharged as regards D1, D2, D3, D4, D5 and TP3;

(b) The Mareva injunction be continued as regards D6-D9, TP1-TP2;

(2) On a nisi basis, costs shall be paid by Cheer Signal to D1-D5 and TP3, to be taxed forthwith if not agreed; there shall be certificate for one counsel for D3 and for 2 counsel for the other Defendants and TP3.

(3) On a nisi basis, costs in relation to D6-D9, TP1-TP2 shall be the plaintiff’s costs in the cause with certificates for 2 counsel;

(4) Costs as between D4 and TP3 on the one part, D6-D9 and TP1-TP2 on the other part shall be apportioned 70:30;

(5) The summonses for leave to vary the terms of the Mareva injunction is dismissed.  On a nisi basis, costs shall be borne by Cheer Signal.  Hearing time and counsel’s fees be apportioned as to 5% for this summons.

144.  I am most grateful to all counsel for their thorough preparation and great assistance to the court.