LAU LAI SHAN LISA v. ZHANG QI AND OTHERS

HCA 1395/2018

[2019] HKCFI 2170

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1395 OF 2018

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DECISION

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Applications

1.  By summons dated 4 March 2019 (“the Summons”), the 1^st Defendant seeks to vary the terms of a proprietary and Mareva injunction granted by Madam Justice Mimmie Chan on 25 June 2018 (“the Injunction Orders”) in two respects.

2.  First, the 1^st Defendant seeks to clarify the terms of the Injunction Orders such that she is only:

  (a)  prohibited from removing from Hong Kong, disposing of, dealing with or diminishing the HK$80 million proceeds from the sale of Kidbrooke Group Limited (“Kidbrooke”) presently held by the 1^st Defendant’s solicitors qua stakeholder; and

  (b)  restrained from removing from Hong Kong, disposing of, dealing with or diminishing her assets whether in her name or not and whether solely or jointly owned up to HK$60 million.

3.  The proposed variation is to make clear that since the HK$80 million currently held by the 1^st Defendant’s solicitors is subject to a freezing injunction, the maximum amount of the 1^st Defendant’s personal assets to be frozen should be limited to HK$60 million and not a total of HK$140 million.  As the Plaintiff’s maximum claim is HK$140 million in the present action, I see no valid objections to the variation or clarification sought by the 1^st Defendant.  Indeed, it is very important that the amount to be frozen or restrained by an interlocutory injunction should be correctly stated and fully justified.  Mr Brown for the Plaintiff has a valid argument that this variation sought by the 1^st Defendant is not clearly stated in the Summons and was only made clear in Mr Chan’s Skeleton Submissions.  However, that is an issue in relation to costs which I shall deal with at the end of this Decision.

4.  Accordingly, I make an order in terms of the proposed amendments as submitted by Mr Chan for the 1^st Defendant with a minor amendment proposed by Mr Brown.

5.  The second aspect of the Summons is controversial and contested.  The 1^st Defendant applied for a variation of the Injunction Orders so that she is permitted to withdraw money in her bank account with the Standard Chartered Bank (Hong Kong) Limited (“Standard Chartered Bank”) as follows:

  (1)  a monthly withdrawal of HK$49,000 to settle legitimate household expenses;

  (2)  a one-off withdrawal of HK$384,830.85 to settle the outstanding sum on her American Express credit card and the late payment charges thereto; and

  (3)  a one-off withdrawal of HK$650,000 being estimated legal fees (including counsel’s fees) up to the discovery stage of the present action.

Applicable legal principles

6.  In Wharf Ltd v Lau Yuen How [2010] 1 HKLRD 783, Au J (as he then was) set out the applicable legal principles as follows:

“ 13. The principles applicable to the release of funds to pay legal costs from an injunction involving proprietary claims are well settled. It is an exercise of discretion which involves a two-stage process:

(a) First, the defendant applying for the release of funds has to demonstrate with full and frank evidence that there are no alternative funds or assets available to him which can be used to pay his legal expenses other than the assets in respect of which the plaintiff brings the proprietary claim. If the defendant fails in this first hurdle, the court need not consider the second stage and the application should be dismissed.

(b) Secondly, once the first hurdle is cleared, the court in the exercise of its discretion will engage in a balancing exercise to weigh the potential injustice to the plaintiff of releasing the funds against the possible injustice to the defendant of depriving him of the opportunity to have legal assistance in advancing what may eventually turn out to be a successful defence. This process is a ‘careful and anxious judgment’, and the court is entitled to look at all the relevant circumstances, and in particular, to weigh the relative strengths of the plaintiff’s proprietary claim in the funds and the defendant’s defence to that claim. In relation to this, it is not sufficient for a defendant to merely establish that he has no other funds, for even so, he must also show that there is an arguable case, for his having recourse to the funds in question, failing which, he has no right to use the money. As Millett LJ (as he then was) said in Ostrich Farming Corp Ltd v Ketchell [1997] EWCA Civ 2953 ‘[n]o man has a right to use somebody else’s money, for the purpose of defending himself against legal proceedings’.

See: Ostrich Farming Corp Ltd v Ketchell, per Roch LJ at p.10; Liu Xian Feng v Liu Bo [2006] 4 HKLRD 33, 37B–H paras.10, 11, per Le Pichon JA; Lit Ma v Chen Kang Huang (unrep., HCSD 9/2007, HCA 218/2005, [2007] HKEC 1605, 27 August 2007, Sakhrani J), paras. 23–28.

14.  In the case of an ‘ordinary’ Mareva injunction, where there is no proprietary claim asserted against the enjoined assets, in the exercise of the court’s discretion faced with an application to release the funds, the court should consider whether the defendant has shown by sufficient evidence that (a) he does not have other assets available to meet the payment; and (b) the purpose of the application is not an attempt to dissipate the assets (which prima facie are the defendant’s) to frustrate the enforcement of judgment by the plaintiff.”

Material facts

7.  It is the Plaintiff’s case that Kidbrooke was incorporated in 1997 to be both the trustee of “The Lau’s Trust” (“the Trust”) and the legal owner of the Trust’s assets.

8.  Lau Chun Cheong (“Lau Senior”) was the Trust’s settlor.  He is the Plaintiff’s paternal uncle.  The Trust’s beneficiaries were Lau Senior’s sons, i.e., the Plaintiff’s cousins.

9.  The Plaintiff, as a much trusted niece, was charged with managing the Trust and its assets.  She was the sole shareholder and sole director of Kidbrooke.

10.  Through gifts of cash by Lau Senior, the Trust accumulated four commercial properties in Sheung Shui and thereafter enjoyed considerable rental income for the benefit of the Trust.  It is the Plaintiff’s case that the “marquee” property in the property portfolio was 41A, 41B Fu Hing Street (“Fu Hing Property”).

11.  The Plaintiff managed the Trust in accordance with the wishes of Lau Senior.  However, the demands of administrating the Trust were taxing on the Plaintiff’s time as she studied and worked as a medical doctor.  The Plaintiff’s brother, Alan Lau provided assistance with routine tasks for the Trust but under the Plaintiff’s supervision and in accordance with Lau Senior’s wishes.

12.  In around 2002, Alan Lau met the 1^st Defendant and they got married in 2007.  The 1^st Defendant then assisted Alan Lau with the administration of the Trust and in the course of the following 10 years, became increasingly involved in the Trust’s management and gained considerable trust from the Plaintiff.

13.  It is the Plaintiff’s case that the 1^st Defendant fraudulently caused her to sign various documents, including corporate documents to effect transfer of the sole share in Kidbrooke from her to the 1^st Defendant, by misrepresenting to her the documents’ contents and purposes.  Through such process, the 1^st Defendant became the sole director and sole shareholder of Kidbrooke and took control of its bank account.

14.  The 1^st Defendant emptied Kidbrooke’s bank account, sold two properties and assigned another property (the “Cockloft”) to a company owned by her.  The 1^st Defendant has never accounted to the Trust for these disposals nor has she ever disclosed what had become of the funds from Kidbrooke’s bank account or the sale proceeds of the two properties sold. 

15.  Mr Brown for the Plaintiff submitted that the final act in the fraud was the sale of the single share of Kidbrooke for HK$140 million (“Sale Proceeds”) on 29 May 2018.  The sale of the single share of Kidbrooke was used as a mean to sell the Fu Hing Property, the last remaining Trust asset at the time.

16.  As the Plaintiff was the rightful owner of the single share of Kidbrooke, she brought these proceedings to recover the Sale Proceeds. The 1^st Defendant is currently released on bail.

17.  The 1^st Defendant’s case is that:

  (1)  The assets of the Trust were in fact owned by her parents-in‑law and not the Trust or Lau Senior.  There was no trust and the assets have nothing to do with the Trust or Lau Senior;

  (2)  As the assets would in due course be gifted by her parents-in‑law to her husband, she was entitled to take control of the assets now and treat them as her own;

  (3)  As the Plaintiff was aware that the assets would ultimately belong to her husband, the Plaintiff willingly and with full knowledge executed all necessary documents to transfer the Trust’s assets to her;

  (4)  Alternatively, if the Plaintiff failed to read the documents that resulted in the loss of control of Kidbrooke, the Plaintiff is bound by her own error in signing the same; and

  (5)  The Plaintiff’s current proceedings is an attempt to deprive the 1^st Defendant of assets rightfully belonging to her, her parents-in-law and husband, for the Plaintiff’s improper personal gain.

18.  I accept Mr Brown’s submission that the following contemporaneous documentary evidence support the Plaintiff’s case:

  (1)  the acknowledgements of receipt by Kidbrooke of the various transfer of funds from Lau Senior;

  (2)  Lau Senior’s own evidence as to the setting up of the Trust, including the Letter of Wishes signed by Lau Senior in respect of the Trust’s operation; and

  (3)  evidence from the accountant who set up the Trust together with all the relevant documents showing Lau Senior’s role in the Trust.

19.  On the other hand, there is no documentary evidence produced by the 1^st Defendant to substantiate her case that the assets belonged to her parents-in-law.  Neither her parents-in-law, nor her husband has filed any affirmation or evidence to support the 1^st Defendant’s case.  I agree with Mr Brown’s submission that it is strange that they have not provided any evidential support to the 1^st Defendant if there is any truth in her case.

20.  Mr Chan for the 1^st Defendant submitted that it is beyond belief that a highly educated and intelligent psychiatrist such as the Plaintiff would have signed the documents (such as board resolution and bought and sold notes) without realizing their purposes or was misled by the 1^st Defendant into believing that they were for tax or insurance purposes.

21.  It is not for this Court at this stage to express a view on whether it is beyond belief for a highly educated professional to have signed documents without realizing their purposes.  This is a matter for trial.  The key issue in this case is that the assets are, on the existing evidence before this Court, trust assets.  The 1^st Defendant has not adduced any evidence to refute the documentary evidence produced by the Plaintiff which overwhelmingly points to the existence of a trust.

22.  There is no way in which the 1^st Defendant could have turned trust assets into her personal assets.

23.  Mr Brown for the Plaintiff further submitted that it makes no sense to suggest that the Plaintiff brought the present proceedings to deprive the 1^st Defendant of her assets for the Plaintiff’s financial gain because:

  (1)  the Plaintiff’s position is that the Trust was for the benefit of Lau Senior’s sons, the beneficiaries of the Trust and not for her. She has no ultimate personal financial interest in bringing these proceedings; and

  (2)  it makes no sense for the Plaintiff to knowingly transfer the sole share in Kidbrooke to the 1^st Defendant and then immediately report the fraud to the Police and sue the 1^st Defendant for misappropriation of trust assets.

24.  On the existing evidence, I accept Mr Brown’s submission. 

25.  Further, the 3^rd Defendant is the principal and 100% shareholder of the 2^nd Defendant, a company providing accountancy services.  Yet, from the Sale Proceeds, just over HK$13.28 million can be directly traced to the 2^nd Defendant’s accounts.

26.  The 3^rd Defendant admits in her defence that she brought documents to the Plaintiff to sign and that included (mixed with other documents) the Plaintiff’s resignation as a director and secretary of Kidbrooke.  It is the Plaintiff’s case that the 3^rd Defendant deliberately misrepresented to her the nature of the documents she was signing and hence played a role in the fraud, which in turn may explain the amount paid to her through the 2^nd Defendant.

27.  The Joint Financial Intelligence Unit (“JFIU”) has frozen the sum of HK$2,593,689 in the 2^nd Defendant’s HSBC account which appears to be what remains of the Sale Proceeds received by the 2^nd Defendant.

28.  On 20 June 2019, Deputy High Court Judge Stock SC granted a proprietary and Mareva injunction against the 2^nd and 3^rd Defendants in respect of the proceeds paid by the 1^st Defendant to the 2^nd Defendant out of the Sale Proceeds.

Analysis

29.  Mr Chan for the 1^st Defendant submitted that the funds in the 1^st Defendant’s Standard Chartered Bank accounts belong to her and the Plaintiff has no proprietary claim over the same.  I am of the view that whether the funds in her Standard Chartered Bank accounts belong to her or not is irrelevant.  The Plaintiff has an outstanding claim of HK$140 million and a Mareva injunction to restrain her from disposing of or dealing with or diminishing the value of her assets in Hong Kong up to the value of HK$60 million.  Her assets in her Standard Chartered Bank accounts are obviously covered by the Mareva injunction.

30.  Mr Brown for the Plaintiff submitted that not only has the 1^st Defendant failed to discharge her duty of full and frank disclosure, in fact, she has positively misled the Court as to her financial position.  In relation to the sum of HK$1.3 million which was said to have been paid to the2^nd Defendant for costs on account for the 5% down payment of the purchase price of a property known as Shop 7 on G/F, Po Shing Mansion, Nos 24/30 and 70 Hau Tei Square and Nos 77/89 Tai Ho Road, Tsuen Wan, New Territories (“the Po Sing Mansion Property”), the 3^rd Defendant had in fact disclosed that the said sum was not used for the purchase of the Po Shing Mansion Property, but rather was used to pay off the 3^rd Defendant’s own overdraft in the sum of HK$1,299,943.06.

31.  Mr Brown submitted that at the time of affirming her 4^th affirmation, the 1^st Defendant must have known that her evidence about the purpose of the payment to the 2^nd Defendant of the sum of HK$1,300,000 was false, as she must have enquired with the 3^rd Defendant as to the progress of the purchase of the Po Shing Mansion Property.  In any event, the 1^st Defendant should have and could have claimed back the sum of HK$1,300,000 from the 2^nd Defendant and/or the 3^rd Defendant.

32.  In the 5^th affirmation of the 1^st Defendant, I note that in §§6 and 10, she deposed that:

“ 6. Of the remaining HK$60 million:

6.1 HK$26,963,332 (being HK$26 million principal, HK$953,332 interest and HK$10,000 costs and disbursements) was paid directly from L&W Lawyers to Future Stars in full and final settlement of the 2^nd Loan.

6.2 The remaining sums were paid to me and of that sum, HK$18 million was advanced by me to a Taiwanese friend by the name of Liu Shih Wei.

6.3 HK$13.28 million was paid by me to IC Accounting Limited (“IC Accounting”).

6.4 HK$1.79 million was lent to a friend.

…

10. Furthermore, to the best of my knowledge, the sum was paid to IC Accounting for legitimate and lawful purposes. I crave leave to refer to my 4^th Affirmation and the marked exhibit therein‘ZQ-17’ true copies of the cheques drawn by me to IC Accounting Limited on diver [sic] dates. To the best of my knowledge, the following sums were paid for the following purposes.

10.1 HK$1.4 million was paid to IC Accounting for services rendered by it on 31 May 2018.

10.2 HK$1 million was paid to IC Accounting so that it could settle the legal fees incurred by L&W Lawyers for the work done on the sale of the share of Kidbrooke.

10.3 HK$1.68 million was paid for costs on account for IC Accounting to settle Kidbrooke’s taxes and stamp duty.

10.4 HK$1.3 million was paid to IC Accounting for costs on account for the 5% down payment of the purchase price of a property known as Shop 7 on G/F, Po Shing Mansion,Nos. 24/30 & 70 Hau Tei Square & Nos. 77/89 Tai Ho Road, Tsuen Wan New Territories, which IC Accounting was handling on my behalf.

10.5 HK$900,000 and HK$5 million were paid to IC Accounting for service fee charged by Success Time Properties Limited,which IC Accounting paid on my behalf.

10.6  HK$2 million was paid to IC Accounting as stakehold money for tax payment and government rent & rate.”

  ( emphasis added)

33.  I find the amount of service fees paid to the 2^nd Defendant cries out for investigation and more detailed explanation.

34.  In the 4^th affirmation of the 1^st Defendant, at §§5 and 6, the 1^st Defendant deposed that:

“ 5. I am a Chinese medicine practitioner practising from my clinic, which I share with my husband Lau Ngar Lun Alan (‘Alan’) who is also a Chinese medicine practitioner, at No.9 Fu Hing Street, Sheung Shui, N.T. I have been in practice for 14 years. I gave birth to my son recently and am taking some time off from my practice. Prior to that, I earned around HK$60,000 per month.

6. At the moment, I earn nothing from my practice as I am staying at home to take care of my son. My husband Alan, who earns around HK$50,000 per month from his practice and rental income of around HK$56,000, supports me by paying around HK$20,000 per month to cover our son’s and my expenses. However, as I shall explain below, Alan’s support is not sufficient to cover all the expenses and therefore I have no choice but to apply to vary the Injunction.” (emphasis added)

35.  First, there has been no disclosure by the 1^st Defendant of her shareholding or entitlement to her clinic.  Mr Brown further pointed out that indeed the 1^st Defendant was caught out in that she still treats patients at her clinic.  The 1^st Defendant’s response that she only practices on a part time and limited basis and only when a particular patient requests to consult her does not sit well with her sworn statement that she is presently not working.  In her 6^th affirmation, at §15, she said that the payments she received from patients for her cases (both in terms of consultation and medicine) would go to the clinic and not to her.  However, there has been no disclosure as to how the profits of the clinic are being shared.

36.  Secondly, the 1^st Defendant applied for a sum of HK$12,000 per month as contribution to mortgage payments for the property in which she currently resides with her husband.  As she has the obligation to make mortgage payments, it follows that she might have some beneficial interest in the property.  This is not addressed at all in her affirmations.  Mr Chan for the 1^st Defendant informed this Court that the property was previously jointly owned by the 1^st Defendant and her husband, but in order to purchase one more property under the current policies, she transferred her share to her husband so that she could buy another property.  However, the plan to purchase another property did not materialise but she still continues to make mortgage payments for the property.  Though Mr Chan informed this Court that the 1^st Defendant has gifted her half share of the property to her husband, it is not at all clear whether the 1^st Defendant still retains and/or claims any beneficial interest to the property given that she contributes to the mortgage payments of the property continuously.

37.  Thirdly, there are various sums of money which the 1^st Defendant lent to her friends which have not been properly accounted for:

  (1)  The 1^st Defendant lent a sum of HK$1.79 million to a friend but there is no evidence as to when the same could be repaid and/or whether the 1^st Defendant had made any attempt to recover the same.

  (2)  The 1^st Defendant has also lent a sum of HK$18 million to a Taiwanese friend.  In a letter dated 11 June 2019 from the 1^st Defendant’s solicitors to the Plaintiff’s solicitors, it is stated that:

“ We are instructed that our client has not received any repayment from Liu Shih Wei (‘Mr Liu’). It is our client’s instruction that, as explained in paragraphs 49.1, 49.2 and 49.3 of her 4^th Affirmation, our client has not advanced the total sum of HK$30 million as agreed in the said loan agreement to Mr Liu. As she has failed to honour the terms in the said agreement, Mr Liu has not performed his contractual duties in return to make any repayment to our client.” (emphasis added)

38.  Mr Brown submitted that the reason given for not making repayment to the 1^st Defendant is difficult to fathom.  I agree.  Further, the 1^st Defendant does not appear to have taken any action to recover the sum of HK$18 million or any interest from her Taiwanese friend thereafter.

39.  Fourthly, the 1^st Defendant has failed to disclose the whereabouts of the sales proceeds of the two other properties which also belonged to the Trust in 2015.  Although Mr Chan for the 1^st Defendant submitted that the 1^st Defendant would be facing another injunction if she sought to use the sale proceeds and/or the Cockloft for her expenses as the same would have been subjected to the same claims from the Plaintiff and/or Kidbrooke (as the proper plaintiff), that does not mean that the 1^st Defendant can avoid her duty to make full and frank disclosure of the whereabouts of such assets.

40.  Fifthly, this Court is distinctly unimpressed by the fact that the 1^st Defendant has contributed to both the clinic which she has a share and the mortgage payments for her matrimonial property with her husband and yet, she submitted that one of the reasons for the present application is that her husband would only pay her HK$20,000 as monthly expenses, including expenses relating to their son.  On the evidence, her husband has a monthly income of HK$50,000 from his medical practice and HK$56,000 rental income from a property.

41.  Sixthly, the 1^st Defendant has not disclosed to this Court on how she defrayed her expenses from 25 June 2018 (date of the Injunction Orders) to the present hearing.  It was only at the hearing that this Court was told that legal expenses in the sum of HK$650,000 had been paid from loans she raised from her friends in the region of HK$1 million.  But that still leaves the question of how she defrayed her monthly expenses of HK$49,000 unanswered.

42.  On the evidence, I am not satisfied that the 1^st Defendant has demonstrated with full and frank evidence that there are no alternative funds or assets available to her which can be used to pay for her expenses, other than the assets which are subjected to both a proprietary and a Mareva injunction. In the circumstances, strictly speaking, it is not necessary for this Court to engage in a balancing exercise of weighing the potential injustice to the Plaintiff by releasing the funds against the possible injustice to the 1^st Defendant.

43.  However, I am of the view that the relative merits of the parties’ case is also a relevant consideration.  The Court is keen to preserve the integrity of trust assets.  The 1^st Defendant has not adduced any evidence to demonstrate that the assets belonged to her parents- in-law.  Instead, the contemporaneous documentary evidence before the Court at this stage demonstrates that the assets belonged to the Trust.  Apart from the HK$80 million which is still in the accounts of the 1^st Defendant’s solicitors, there is still an outstanding sum of HK$60 million which the 1^st Defendant has to account for to the Plaintiff.

44.  Finally, Mr Brown submitted that in relation to the American Express credit card debts, the 1^st Defendant’s position is that she would defend the same.  As for the legal expenses of HK$650,000, the same has been settled from the loans that the 1^st Defendant raised from her friends.

45.  To conclude, I am of the view that the 1^st Defendant has not demonstrate with sufficient evidence that she does not have other assets available to meet her expenses.

Disposition

46.  For all the reasons stated above, I make the following orders:

  (1)  The Injunction Orders are varied in terms of the draft Orders as agreed by the parties;

  (2)  The rest of the Summons dated 4 March 2019 is dismissed.

47.  As far as costs is concerned, as the 1^st Defendant only made clear the terms of her proposed revisions in her Skeleton Submissions and such proposed revisions were not seriously contested at the hearing, I am of the view that there is no valid reason to depart from the usual rule that costs of the Summons should follow the event.

48.  Accordingly, I make a costs order nisi that the 1^st Defendant is to pay the costs of and incidental to the Summons dated 4 March 2019 forthwith, to be taxed on a party to party basis if the parties cannot agree.  The costs order nisi will become absolute unless the parties take out applications to vary the same within 14 days from the date hereof.

49.  Finally, it remains for me to thank Mr Brown for the Plaintiff and Mr Chan for the 1^st Defendant for their assistance to this Court.