OSK ASIA FUTURES LTD v. LAM CHI BIN STANLEY AND ANOTHER

HCA 10335/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 10335 OF 2000

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D E C I S I O N

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1. The Judgment Creditor was a member of the Hong Kong Futures Exchange Ltd. and the Judgment Debtor was one of its customers. The Judgment Debtor was sued by the Judgment Creditor for payment of a deficit of HK$9,147,400.00 arising from the Debtor's trading in 250 Hang Seng Index Futures October contracts. On 20th April 2001, Master M. Wong ordered that leave be given to the Debtor to defend the action on condition that he should make payment of HK$2.5 million into Court within 14 days failing which the Creditor was entitled to enter final judgment as per the claim. The Debtor appealed against the Master's order. He also applied for stay of execution of the Master's order pending appeal. This application was dismissed and he also appealed. On 7th June 2001, the Honourable Mr. Justice Chung allowed his appeal on the dismissal of his application for stay of execution pending appeal. The execution of the Master's order was stayed until the hearing of his appeal. The appeal was heard before the Honourable Mr. Justice Waung on 16th July, 2001. At the end of the hearing, the learned Judge gave summary judgment on the claim with interests and costs for all stages of the action against the Debtor.

2. On 27th September, 2001, Master Ho ordered that the Debtor be orally examined under Order 49B of the Rules of the High Court on 15th November, 2001 before Master B. Kwan. On 15th November, 2001, the examination was adjourned to 13th December, 2001. On 13th December, 2001, Master Au-Yeung further adjourned the examination to a date to be fixed. The learned Master also made an order in Chinese requiring the Debtor to produce to the Creditor at least 21 days before the adjourned hearing, among other documents:-

(a) all passbooks, statements and cheque counterfoils of all accounts and bank accounts opened in the 2 years before 13th December, 2001 with banks or deposit taking companies in Hong Kong or overseas (including but not limited to the Hong Kong Bank, Po Sang Bank, the Ka Wah Bank and the Bank of China) by the Debtor whether in his own name or jointly with others or in the name of any company or business operated by the Debtor of which the Debtor was the sole proprietor or a partner or a shareholder (regarding private company);

(b) all audited or unaudited books and accounts covering a period of 2 years prior to 13th December, 2001 for any company or business operated by the Debtor of which the Debtor was the sole proprietor or a partner or a shareholder (regarding private company) whether in Hong Kong or overseas;

(c) the tax demand note and tax return of any company or business operated by the Debtor in Hong Kong or overseas in the period of 2 years before 13th December, 2001 of which the Debtor was the sole proprietor or a partner or a shareholder (regarding private company) which included and not limited to that which the Debtor held an interest;

(e) all documents of title including deeds and land certificates for all properties owned in the name of the Debtor or beneficially owned by him alone or together with others or owned by any company or business of which the Debtor was the sole proprietor or a partner or a shareholder (regarding private company) regardless of their locations;

(k) the audited and unaudited accounts in relation to the following companies:-

(i) Silicon SMT Manufacturers Limited; and

(ii) Computer Home Distribution Limited.

3. The examination commenced on 1st March, 2002 and the Debtor appeared in person as before. It was not completed and was adjourned to 18th May, 2002. On that day, the Debtor was represented by Mr. Paul Kong on the instructions of Messrs. Quan & Co. The examination was not finished on that day and was further adjourned to 6th July, 2002. The Debtor's legal representation continued and on 6th July, 2002, the questioning of the Debtor was completed.

4. At the hearing on 1st March, 2002, the Creditor complained that the Debtor had failed to comply with the order of Master Au-Yeung. Prior to adjourned hearing on 18th May, 2002, the Debtor produced some more documents. However, the discovery was still insufficient. At the request of the Creditor, I made an order on 18th May, 2002 requiring further disclosure of documents. Subject to some criticisms that the Debtor's solicitors had failed to comply with all the time limits, there was no dispute that the Debtor had complied with my order. However, that does not mean that the Debtor had fully complied with the requirements of Order 49B or the order of Master Au-Yeung.

The Creditor's Application

5. At the end of the questioning of 6th July, 2002, the Creditor applied for an order that the Debtor be imprisoned under Order 49B rule 1B. The Creditor relied on Order 49B rules 1A(2) and 1B(1)(c) and said that there were 3 matters in respect of which the Debtor had failed to make full disclosure. The provisions of Order 49B rules 1A(2) and 1B(1)(c) are as follows:-

"1A. Examination of debtor (O. 49B, r.1A)

(2) The judgment debtor shall, at his examination, make a full disclosure of all his assets, liabilities, income and expenditure and of the disposal of any assets or income and shall, subject to the directions of the Court, answer all questions put to him.

1B. Power of the Court following examination (O. 49B, r.1B)

(1) Where the Court is satisfied, following the examination conducted under rule 1A or following an examination conducted under Order 48, that the judgment debtor-

(c) has willfully failed to make a full disclosure as required under rule 1A(2) or at the examination under Order 48 or to answer any question as provided under that rule or Order,

it may, in its discretion, order the imprisonment of the judgment debtor for a period not exceeding 3 months."

6. In making the application, the Creditor accepted that the burden of proof was on the Creditor and the standard of proof was beyond reasonable doubt (see Bank of India v. Murjani and Others Civil appeal No. 12 of 1991).

The First Complaint

7. The first matter relied on by the Creditor was the Debtor's failure to make discovery of the statements of an account he maintained with the Standard Chartered Bank. This was said to be contrary to paragraph 2(a) of the order of Master Au-Yeung of 13th December, 2001. This account was revealed for the first time on 4th July, 2001 when the Hong Kong Bank explained to the Creditor's solicitors about a withdrawal of HK$1,933,333.00 by the Debtor on 21st November, 2000 from its Hong Kong Bank account. The sum was transferred to the Debtor's account with the Standard Chartered Bank (see page D139).

8. On this charge of non-disclosure, the Debtor explained that the account with the Standard Chartered Bank had been closed in about November, 2000 and he though that the order of Master Au-Yeung on 13th December, 2001 only covered accounts which were still active and not accounts that had been closed. I find this explanation not entirely unreasonable bearing in mind that one of the primary purposes of the examination was to find out whether the Debtor at the time of the examination had assets available for satisfaction of the judgment. I therefore do not find beyond reasonable doubt that the Debtor had deliberately failed to disclose the statements of his account with the Standard Chartered Bank.

The Second Complaint

9. The second charge was that the Debtor had failed to disclose his income. The Creditor relied on the deposits of HK$200,000.00 on 27th October, 2000 (page D71), HK$138,888.00 on 24th March, 2001 (page D80), HK$15,000.00 on 25th May, 2001, HK$35,000.00 on 1st June, 2001, HK$20,000.00 on 6th August, 2001 and HK$38,000.00 on 4th September, 2001 (all on page D90). The Creditor also relied on the cash withdrawals of HK$190,000.00 on 27th October, 2000 (page D71) and HK$133,333.00 on 24th March, 2001 (page D80).

10. On this complaint, I note that the Debtor's trading in 250 Hang Seng Index Futures October contracts took place on 13th October, 2000 and the Debtor's account with the Creditor was liquidated on 16th October, 2000. For this reason, Mr. Chan for the Creditor abandoned his attempt to rely on deposits and withdrawals that took place before October, 2000.

11. For the deposits of HK$200,000.00 on 27th October, 2000 and HK$138,888.00 on 24th March, 2001, the Debtor did not give any concrete explanation as to these sums individually. His answer for these 2 sums and for some other substantial deposits was that he had some friends who would deposit signed blank cheques with him. In case of need, he would at the request of such a friend use a cheque to withdraw money from the friend's account with the Hong Kong Bank and then dispose of the same at the friend's directions. The injection of the friend's fund into the Debtor's account with the Hong Kong Bank was because funds transferred from one Hong Kong Bank account into another account with this bank can be utilized on the same day and without the need to go through the clearing house.

12. Such explanation, though seemed odd, cannot be ruled out as a reasonable possibility. The reason being that these funds came in and went out almost in total on the same dates. Very little remained after the withdrawals. This supports his explanation that the cheques were paid into Hong Kong Bank for the sake of immediate availability of funds. Similar deposit of cheques for immediate availability can be seen before the trading of the 250 contracts on 3rd April, 2000 for HK$1,000,000.00, on 11th August, 2000 for HK$100,000.00, on 24th August, 2000 for HK$1,018,888.00 and on 25th August, 2000 for HK$188,888.00. Furthermore, his explanation that such funds could have come from his friends was also supported by a transaction on 20th November, 2000 when he received a sum of HK$2,000,000.00 from one Mr. Ng Lai Yick (pages D73 and D138).

13. On the 2 withdrawals of cash of HK$190,000.00 on 27th October, 2000 (page D71) and HK$133,333.00 on 24th March, 2001 (page D80), I accept that there was a reasonable possibility that the Debtor was just helping a friend in the channeling of the friend's funds. These were the proceeds of cheques which were made immediately available through the Hong Kong Bank.

14. All in all, I do not think I can reject the Debtor's explanation on these funds as a reasonable possibility and I decline the Creditor's application on this ground of alleged non-disclosure.

15. In relation to the 4 credits of HK$15,000.00, HK$35,000.00, HK$20,000.00 and HK$38,000.00 credited between late May to early September, 2001 (all on page D90), they were withdrawn almost in total on the days following their deposits. The Debtor said that these sums were deposited by his mother for his own use. The Creditor criticized the Debtor for contradicting himself when he had earlier said that he only spent a few thousand dollars every month. The Debtor might have contradicted himself or he might have failed in being accurate when he was trying to generalize, but I do not find this a non-disclosure.

The Third Complaint

16. The third complaint is the Debtor's failure to disclose his assets in relation to his investment in a real property project in Shanghai called Kam Pik Garden (or Kimby Garden). The Debtor referred to this investment for the first time in his affirmation affirmed on 4th May, 2001 for use in his application to stay the execution pending appeal of the order giving him leave to defend the action on condition of his payment into court of HK$2.5 million. He said in paragraphs 5 to 19 of his affirmation (pages A71 and 72):-

"5. I am unable to meet the said Order without depriving myself of all my working capital and selling my investment in a property project in the People's Republic of China ("PRC") at an undervalue in consequence of which I would be financially ruined.

6. By an Agreement in Chinese dated 25th November, 2000 ("the Agreement") signed between Shanghai Lian Fa Real Estate Development Co. Ltd. ("Lian Fa") and Silicon SMT Manufacturers Limited ("Silicon"), in effect, Silicon has acquired the property known as Kam Pik Garden situate in Shanghai, PRC ("Shanghai Property") at the price of HK$7,200.00 per square metre. There is now produced and shown to me marked "LCBS-3" copy of the Agreement.

7. In accordance with Clause 3 of the Agreement Silicon has paid the total sum of HK$34,000,000.00 to Lian Fa.

8. I am the beneficial owner of the entire issued share capital of Silicon and I provided the funding of Silicon in the Shanghai Property. There is now produced and shown to me marked "LCBS-4" copy of Return of Allotments of Silicon. It can be noted that 9,998 shares were allotted to me. The 2 subscribers shares are held by me and Ko Kwok Sun respectively. In fact Ko Kwok Sun held one of the subscribers share on trust for me.

9. The payments of HK$34,000,000.00 by Silicon to Lian Fa under the Agreement were out of funding belonging to me.

10. Lian Fa is now utilizing the said HK$34,000,000.00 for completion of the construction and decoration of the Shanghai Property and the constructions is expected to complete in November, 2001.

11. There is now produced and shown to me marked "LCBS-5" copy of Certificate of Right of User of National Land of the Shanghai Property.

12. There is now produced and shown to me marked "LCBS-6" copy of Certificate of Approval of Construction Plan of the Shanghai Property.

13. There is now produced and shown to me marked "LCBS-7" copy of Pre-sale Permit of the Shanghai Property.

14. Notwithstanding Lian Fa has obtained the Pre-Sale Permit of the Shanghai Property, the general public in PRC will only purchase properties the constructions of which has been completed.

15. Therefore, sale of the Shanghai Property can only be commenced after completion of construction in November, 2001.

16. If I have to sell the Shanghai Property now I will have to sell the same at a grossly undervalue and this will result in myself being financially ruined.

17. According to the estimate before the signing of the Agreement, the sale of the Shanghai Property after completion of construction could bring in a profit in the region of HK$30,000,000.00

18. I am advised by my legal adviser and verily believe that I have good merits and my appeal shall be successful.

19. In the premises, I respectively pray that his Honourable Court may order the execution of the Order made by Master M. Wong on the 20th day of April 2001 be stayed pending the disposal of my appeal."

17. The Chinese Agreement dated 25th November, 2000 was produced at pages B142 to B143. Clause 3 of the agreement required Silicon to pay Lian Fa HK$5,000,000.00 on 25th November, 2000, HK$12,000,000.00 on or before 25th December, 2000, HK$17,000,000.00 on or before 23rd February, 2001 and the balance of HK$49,470,104.00 within 14 days from the issuance of the occupation permit. The HK$34,000,000.00 as referred to in his affirmation tallied with the total of the first to third payments in clause 3.

18. In addition to the agreement between Lian Fa and Silicon, a copy each of (i) a Certificate for Use of Land of the Nation dated sometime in November, 1992, (ii) a Certificate of Approval of Construction Plan and (iii) a Pre-sale Permit dated August, 1999 all issued to Lian Fa are at pages B147 to B153. Prior to the hearing on 18th May, 2002, the Debtor also produced a copy Chinese document which appeared to be a sales brochure for Kam Pik Garden. A copy of this is at pages C120 to C160.

19. Apart from the agreement, the Debtor or Silicon was not mentioned in any of the other documents in relation to Kam Pik Garden. There were also no accounting document in relation to the project or any document evidencing any payment by Silicon to Lian Fa. There is thus no information on where was the source of the HK$34,000,000.00. Nevertheless, on the basis of what he said on affirmation on 4th May, 2001, he has already paid HK$34,000,000.00 to Lian Fa pursuant to clause 3 of the agreement and he would have substantial interests in the 39 houses covered by the agreement with Lian Fa.

20. However, when he was questioned on 1st March, 2002 about this investment, he said at pages C11G to C15L that in fact no payment had been made by him to Lian Fa at all. He said that what he did was to provide labour and materials of a worth of HK$34,000,000.00 for the construction of 39 houses in Kam Pik Garden. The labour and materials to the tune of HK$34,000,000.00 were however not provided by him but by one Zhen Jiang Company, a business owned by the Government of Zhen Jiang City. Furthermore, Zhen Jiang Co. provided the labour and materials for him only on the basis of trust or his reputation and there was nothing on paper recording his agreement with Zhen Jiang. He was familiar with Zhen Jiang and had influence in it. Zhen Jiang would only get bank its outgoing upon the sale of the properties. He explained that there was no written agreement with Zhen Jiang as what Zhen Jiang did was illegal and the illegal transaction could not have been recorded in writing. He further referred to clause 5 of the agreement at page B143 and said that his obligation to provide the HK$34,000,000.00 under clause 3 was in fact to make available loans at HK$34,000,000.00 for the use of Lian Fa as provided in clause 5.

21. He was questioned on this investment again 18th May, 2002 at pages D23A to D24F and he maintained what he said on 1st March, 2002. He further said that Zhen Jiang Co. had been wound up and was taken over by a Tung Fang Asset Management Company. However, his enquiry to Tung Fang was met with no answer.

22. He was further questioned about Zhen Jiang and Tung Fang at page D28G to T. He said that he did not know the actual name of Zhen Jiang Co. or its address. He only knew that it was a company owned by the government of Zhen Jiang City.

23. I note that the price payable by Silicon under the agreement was HK$7,200.00 per square metre or a total of HK$83,081,304.00 for 11,539.07 square metres. This sum was broken down into 4 payments in clause 3 as referred to in paragraph 17 above. Clause 5 of the agreement refers to a loan of HK$34,000,000.00 to be arranged by Silicon for Lian Fa, but of that loan, HK$10,000,000.00 was to be repaid by Lian Fa upon payment by Silicon of Hk$49,470,104.00 under clause 3. The HK$34,000,000.00 mentioned in clause 5 is thus not the same HK$34,000,000.00 mentioned in the first to third payments in clause 3. The payments in clause 3 were not to be deducted or repaid upon Silicon paying the balance of HK$49,470,104.00.

24. I do not accept that there was a company known as Zhen Jiang which had provided labour and materials worth HK$34,000,000.00 in discharge of the payment obligations in clause 3. What the Debtor has said in his affirmation clearly does not support such a case. He produced the agreement in that affirmation and said that he had made the payment. There was no reason why he could not have gone on to say in the affirmation that the payment was by way of labour and materials provided by Zhen Jiang on his behalf and that Zhen Jiang did so purely because of trust or his reputation.

25. If the construction were indeed carried out by Zhen Jiang co. for and on behalf of Silicon or the Debtor, I also do not believe that Zhen Jiang would have done so without any written agreement with Silicon or the Debtor. There should be some documentation detailing the arrangement. If Zhen Jiang Co. should be a company owned by a local government, it would be beyond belief that there would be no written agreement to protect Zhen Jiang's interests. I cannot imagine how those responsible for the running of Zhen Jiang would have accounted to their supervisors on this project if there were no documentation at all. The sum of HK$34,000,000.00 is substantial by the standard of Hong Kong, it is a lot more substantial by the standard of the Mainland. The Debtor's story is wholly incredible.

26. The fact that the Debtor cannot even provide the correct name and address of Zhen Jiang Co. fortifies my belief that he has made up the story of Zhen Jiang Co. He also provided a shield against further investigation of Zhen Jiang by alleging that it had been wound up. His story about Tung Fang and the allegation that he could not find out a thing from Tung Fang is just as incredible as his story about Zhen Jiang. He made up these stories as excuses hoping to cover up his refusal to make full disclosure on his investment of HK$34,000,000.00 in Kam Pik Garden. I do not accept Mr. Kong's submissions that things in the Mainland can be done in the way as described by the Debtor.

Order

27. I refer to the Debtor's affirmation evidence as quoted above and find beyond reasonable doubt that the Debtor has failed to make a full disclosure of all his assets and investment in Kam Pik Garden. I therefore order that the Debtor be imprisoned for 1 month under Order 49B rule 1B1(c) of the Rules of the High Court. I also fix the allowance under rule 2 at HK$650.00 per day.

28. I also make an order nisi that the Debtor do pay the Creditor costs of the examination with certificate for counsel. I make a further order nisi that there be a certificate for counsel for the costs order made on 1st March, 2002.