南京涵恩物資有限公司 v. WU HUI DI AND ANOTHER

HCMP 1472/2020 &
HCMP 1931/2020 &
HCA 1014/2021 &
HCA 1601/2021

[2025] HKCFI 1747

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1472 OF 2020

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BETWEEN

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MISCELLANEOUS PROCEEDINGS NO 1931 OF 2020

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BETWEEN

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ACTION NO 1014 OF 2021

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ACTION NO 1601 OF 2021

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D E C I S I O N

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A. INTRODUCTION

1.  There are 2 camps in this case:

(1) Fengli Group (Hongkong) Co., Limited (“Fengli HK”) and Ready Success Group Limited (“Ready Success”), collectively referred to as “Judgment Creditors” below. They are represented by Ms So.

(2) The Plaintiffs in HCMP 1472 and 1931/2020 (“Nanjing Hanen”). They are represented by Mr Cheung and Mr Lau.

2.  HT Steel (World) International Trade Holdings Co., Limited (“HT Steel”) is the judgment debtor of the Judgment Creditors.

3.  There are 2 sets of proceedings:

(1) HCA 1014/2021 and HCA 1601/2021 (“the HC Actions”); and

(2) HCMP 1472/2020 and HCMP 1931/2020 (“the HCMP Proceedings”) in which:

(a) Wu Hui Di (“WHD”) and Wu Li (“WL”) are the 1^st and 2^nd Defendants respectively.

(b) Nanjing Hanen obtained Mareva injunction orders against WHD, WL and HT Steel.

4.  Before this Court are the following applications:

(1) The Judgment Creditors’ applications for garnishee orders absolute respectively in the HC Actions against HT Steel as judgment debtor; and

(2) The Judgment Creditors’ summonses filed on 4 February 2022 (“Variation Summonses”) in the HCMP Proceedings to vary the Mareva injunction orders such that funds in the bank accounts of HT Steel can be released pursuant to the garnishee orders absolute to be made in the HC Actions.

5.  Nanjing Hanen oppose the applications on the ground that there are circumstances which are so suspicious that the Court should investigate the bona fides of the judgment debts obtained by the Judgment Creditors.

6.  The Judgment Creditors disagree. They say that the present application is the necessary next step to properly give effect to the enforcement of valid default judgments they have obtained in the HC Actions, which have not been set aside by anybody.

7.  Having read the affirmation of service filed by the Judgment Creditors, I was satisfied that notice of the hearing has been given to HT Steel, and it was appropriate to proceed with this hearing in its absence.

B. FACTUAL BACKGROUND

8.  The following facts are not disputed or indisputable. I adopt the summaries helpfully compiled by counsel on both sides.

B1. Claims by Nanjing Hanen in the HCMP Proceedings

9.  On 6 May 2019, Nanjing Hanen obtained a judgment ( (2018) 苏 01 民初 1644 号) from the Intermediate People’s Court of Nanjing City, Jiangsu Province, against WHD and WL (“the Mainland Judgment”).

10.  At the outset, it might be convenient to note that WHD, WL, Fengli HK, Ready Success, and HT Steel were all related parties of a PRC company known as 丰立集团有限公司 (“Fengli PRC”, together with all of its Mainland/Hong Kong/overseas subsidiaries, “Fengli Group”):

(1) WHD was the legal representative (法定代表人) and director of Fengli PRC. Each of WHD and WL was a 50% shareholder of Fengli PRC; and

(2) Fengli HK, Ready Success and HT Steel were either wholly owned or controlled subsidiaries of Fengli PRC.

11.  On 15 September 2020, Nanjing Hanen applied for registration of the Mainland Judgment pursuant to the Mainland Judgments (Reciprocal Enforcement) Ordinance (Cap. 597) and Order 71A of the Rules of the High Court (Cap. 4A) (“RHC”).

12.  Pursuant to an order made by Master Hui dated 15 December 2020, the Mainland Judgment was registered in Hong Kong (“Registration Order”). Pursuant to the Registration Order, WHD and WL were adjudged to pay the sum of RMB 33,938,799.79 together with interest accruing on the principal sum of RMB 31,144,243.47 at judgment rate until full payment.

13.  Prior to the Registration Order, on 30 October 2020, Nanjing Hanen obtained the Mareva injunction orders in the HCMP Proceedings against WHD, WL and other related companies (as Chabra defendants), including Fengli HK and HT Steel, prohibiting each of them from removing from Hong Kong or in any way disposing of their assets within Hong Kong up to the value of RMB 31,144,243.27.

14.  The Mareva injunction orders have been continued by various orders in 2020. In May 2021, the Mareva injunction orders as against Fengli HK was discharged under mutual agreement.

15.  Despite active pursuit of various remedies, Nanjing Hanen only managed to recover around HK$2.6 million.

B2. Claims by the Judgment Creditors in the HC Actions

16.  On 2 July 2021, Fengli HK commenced HCA 1014/2021 against HT Steel. By the generally indorsed Writ of Summons issued on the same date (and amended on 5 July 2021), Fengli HK claimed against HT Steel for the sums of HK$5,306,577.94, US$1,344,197.69, AU$15.81 and JPY4,429 (or their HKD equivalent), “being the balance of the amount loaned by and owing from [HT Steel] to [Fengli HK] during the period from 1 March 2016 to 31 May 2020”.

17.  On 30 September 2021, Fengli HK obtained default judgment in HCA 1014/2021.

18.  On 21 October 2021, Ready Success commenced HCA 1601/2021 against HT Steel. By the generally indorsed Writ of Summons issued on the same date, Ready Success claimed against HT Steel for the sums of US$1,111,249.74 and AU$360,449.92 (or their HKD equivalent) “being the balance of the amount borrowed by and owing from [HT Steel] to [Ready Success] during the period from 11 January 2016 to 27 June 2017”.

19.  On 26 November 2021, Ready Success obtained default judgment in HCA 1601/2021.

20.  On 4 February 2022, the Judgment Creditors:

(1) Applied for garnishee orders nisi in the HC Actions;

(2) Applied by the Variation Summons in the HCMP Proceedings to vary the Mareva injunction orders, without any supporting affirmation.

21.  On 24 February 2022, garnishee orders nisi were granted by Master Lai.

22.  On 5 September 2022 (7 months after the application), upon exchange over correspondence, Nanjing Hanen’s solicitors were provided with a draft 3^rd Affirmation of Zhang Yu (張宇) (“Mr Zhang”) (“the Draft Zhang-3^rd”).

23.  On 20 November 2023, the Judgment Creditors obtained leave to file the 3^rd Affirmation of Mr Zhang in support of the Variation Summonses. As elaborated below, the filed version of the 3^rd Affirmation of Zhang Yu (“Zhang-3^rd”) is different from the Draft Zhang-3^rd.

C. THE PARTIES’ RESPECTIVE STANCE

C1. Judgment Creditors’ stance

24.  The Judgment Creditors submit that the default judgments remain valid and effective, and constitute proper judgment debts which they are entitled to enforce. The default judgments have not been appealed against or set aside, by Nanjing Hanen or anybody else. What the Judgment Creditors are now seeking is payment from HT Steel, the judgment debtor, under an inter-company restructuring scheme; but not the shares frozen by the injunction orders.

25.  According to the Judgment Creditors, the judgment debts were incurred by HT Steel to them in the following circumstances.

26.  By a judgment dated 27 August 2015 (“Mandatory Restructuring Judgment”), the Zhangjiagang People’s Court ordered the mandatory restructuring (司法重组) of Fengli PRC and its 28 subsidiaries/related companies in the Mainland (“Fengli PRC Group”).

27.  By a further judgment dated 16 September 2015, the Suzhou branch of Ernst & Young (“EY”) was appointed as manager (管理員) of the restructuring, with Mr Zhang as the team leader of the restructuring team within EY. EY took over various companies within the Fengli PRC Group in its position as manager, and conducted investigations into the same, as well as subsidiaries outside the jurisdiction, such as Fengli HK.

28.  EY and Fengli PRC subsequently prepared a draft proposal (丰立集团有限公司（含 28 家关联公司）重整计划草案) for such restructuring, which was approved by the Zhangjiagang People’s Court by its judgment dated 23 August 2016 (“Restructuring Proposal”).

29.  Pursuant to the Restructuring Proposal, amongst others, a limited partnership known as 张家港融汇丰商务管理企业（有限合伙）(“RHF”) was designated to act as a vehicle for the creditors and to take control over the Fengli PRC Group. Mr Zhang / EY were in turn authorised by RHF to implement the restructuring of the Fengli PRC Group.

30.  As part and parcel of the restructuring process, in order to further consolidate control over subsidiaries or associated companies of Fengli PRC out of jurisdiction, RHF entered into debt settlement agreements (债务和解协议) (“Debt Settlement Agreements”) with WHD and WL respectively.

31.  Each of the Debt Settlement Agreements for WHD and WL contain substantially the same clauses:

(1) Recitals (4) provide that both WHD and WL had, by way of an undertaking (承諾函), guaranteed liabilities of Fengli PRC Group, and accordingly in such capacities remained liable to RHF for the same;

(2) Recitals (5) provide that WHD indirectly or directly owned shares in various related companies of Fengli PRC, including HT Steel and Ready Success. WL also indirectly or directly owned shares in related companies including HT Steel;

(3) Clauses (1) provide that in consideration of WHD and WL agreeing to transfer to RHF all the shareholding, assets and choses in action in respect of such related companies in their control, RHF agreed not to take any further enforcement action against each of WHD and WL in respect of their liabilities as guarantor; and

(4) Clauses (2) provide that WHD and WL also agreed to transfer control over the relevant related companies’ bank accounts to Mr Zhang.

32.  Accordingly, through the Debt Settlement Agreements, RHF was able to take control of the various related companies and their bank accounts.

33.  In order to effectively implement the restructuring, RHF decided to consolidate the funds of various related companies and subsidiaries across the Fengli PRC Group into one designated company:

(1) This would enable the manager to manage all available funds kept in one location, as a matter of convenience and to enable easy management and access, in line with the manager’s primary objective of preserving the assets of the Fengli PRC Group and protecting its interests;

(2) A number of such companies did not have any operations and thus did not have to be holding any cash reserves anyway; and

(3) In addition, as some companies within or associated with the Fengli PRC Group based out of jurisdiction were involved in litigation, keeping cash in those companies gave rise to risk that such funds could be seized or enforced upon outside the restructuring process. It was therefore believed to be more prudent to pool the Fengli PRC Group’s funds into one company, namely HT Steel, which was one of the foreign companies with a “clean record” in that it did not have complicated accounts and was not involved (at the time) in any litigation.

34.  As the objective of the consolidation exercise was to enable HT Steel to hold on behalf of all relevant companies the available cash reserves as a repository, as a matter of accounting and proper booking of the intra-group transfers, the various subsidiaries (such as Fengli HK and Ready Success) therefore transferred amounts to HK Steel, and in turn, HT Steel accrued corresponding liabilities to repay such amounts in due course.

35.  The Judgment Creditors say that it was in these circumstances that they commenced the HC Actions to demand repayment of the amounts which had been transferred by them to HT Steel.  The default judgments they obtained confirmed the extant liabilities owed by HT Steel as a result of the consolidation exercise of the inter-company transfers.

	Owed to Fengli HK	Owed to Ready Success
HKD	5,306,577.94	-
USD	1,344,197.69	1,111,249.74
AUD	15.81	360,449.92
JPY	4,429.00	-

The Judgment Creditors are seeking payment of the monies held by HT Steel, but not the shares, that form the subject matter of the Mareva injunction orders.

C2. Nanjing Hanen’s stance

36.  Nanjing Hanen’s stance is that there are significant and unexplained (or unexplainable) suspicions regarding the alleged bona fide intra-group restructuring scheme. There are peculiar aspects of the Judgment Creditors’ evidence which cast doubt on the bona fides or genuineness of the Judgment Creditors’ judgment debts.

D. THE ISSUES

37.  The issues are:

(1) Which party bears the burden of proof to satisfy the Court as to the bona fides of the judgment debts (“Burden of Proof Issue”); and

(2) Whether there are circumstances that give rise to suspicions which call for investigation into the bona fides of the judgment debts (“Bona fides Issue”).

E. LEGAL PRINCIPLES

E1. Garnishee order absolute

38.  The legal principles applicable to exercise of discretion to make or refuse to make a garnishee order absolute are well-established. As summarised in International Associated Attorneys Ltd v Eurostock Energy Ltd [2012] 6 HKC 570, Au-Yeung J:

(1) The starting point is that a judgment creditor is entitled to enforce the judgment he has secured against the judgment debtor (§17);

(2) In the absence of a stay, a successful plaintiff may enforce his judgment against the defendant as it is given (§19); and

(3) The situation is no different where the funds to be garnisheed are subject to a Mareva injunction obtained by someone other than the successful plaintiff. The purpose of a Mareva injunction is not to prevent creditors from exercising their rights (§20).

39.  As to the last point, it is well established that Mareva injunction does not create a security interest, confer priority or any proprietary interest on the party obtaining the injunction. Accordingly, a Mareva injunction would not have the effect of preventing the judgment creditor from exercising his right to seek a garnishee order: Clearflow Commercial Finance Corp v ATL Power Systems Co, Limited, HCA 750/2017, 13 July 2017, §6, DHCJ Kwan (as she then was).

40.  Where there are interests of non-parties involved,

(1) It is usually not necessary to consider the interests of non-parties except in circumstances like where the judgment debtor was in the process of being wound up or where liquidation or some form of scheme of arrangement was imminent, or there may be situations where other proceedings for enforcement are on foot, in which event, the court may take into account the interests of other parties: International Associated Attorneys, §18. Instead of preferring one creditor over another eg in the case of insolvency or in case of doubt whether the estate is insolvent, the money in the hands of the garnishee should be ordered to be paid into court, pending an enquiry as to whether or not the estate is insolvent: E.G.O. Polska S.P.Z.O.O. v Profit Power International Capital Limited [2022] HKCFI 3299, §24(2)(a) and (b), Recorder Rachel Lam SC.

(2) Importantly, the court (i) has the right and duty to take into account all circumstances of the case; (ii) should exercise its discretion so as to do equity, so far as possible, to all the parties involved. Liquidation of a company brings into operation a statutory scheme for dealing with the company’s assets, and accordingly if such liquidation occurs after the making of the charging order nisi and before the order is made absolute, the court in its discretion will decline to make the charging order absolute (§24(3)).

E2. For examining the circumstances leading to the judgment

41.  In International Associated Attorneys, Au-Yeung J affirmed the Court’s power to examine the circumstances leading to the judgment obtained:

(1) The court should be satisfied as to the bona fides of the judgment debt. In exercising its discretion, the court should not be precluded from examining the circumstances leading to the judgment. Otherwise, by collusion between an applicant and a defendant to the criminal proceedings, the restrained assets might be irretrievably lost (§48);

(2) Collusion may take various forms, eg with a defendant actively consenting to judgment for a bogus claim or deliberately refraining from taking part in the proceedings leading to a default judgment against him (§48); and

(3) A default judgment is well-known to be entered by administrative action rather than after a full judicial enquiry (§51).

42.  In Kanematsu-Gosho (H.K.) Ltd & Anor v Lee Boon-chean & Ors [1986] HKLR 59 at 65H-I, in considering what was “necessary for the purpose of justice”, Hunter J (as he then was) held:

“35. … the significance of the judgment must, I think, depend upon the nature of that judgment, and the nature of the enquiry which led to that judgment. Having regard to this history and the nature of this judgment, it seems to me that it would be absurd for the court to treat the judgment here as anything like decisive, because the simple fact remains that judgment debts can be contrived as readily as any other debts….”

E3. Variation of injunction

43.  Consequent upon a garnishee order nisi being made absolute, the Court may vary an injunction order in order to allow sums to be released to meet the garnishee order absolute: Rong Wei v Chiu Sung Fai [2020] HKCFI 692, §§24-25, Au-Yeung J.

F. BURDEN OF PROOF ISSUE

44.  Counsel on both sides agree that the onus lies with the Judgment Creditors for variation of the Mareva injunction orders to establish that the debt is a bona fide one, and such onus was not discharged by a consent judgment: Kanematsu-Gosho (H.K.) Ltd, pp64F-66D.

45.  Whether the Court is satisfied with the bona fides depends on the particular circumstances leading to the judgment in question in each case. During this exercise, although the Court is not making findings of fact as to whether the claim is established or not, the Court is entitled to examine all the underlying circumstances leading to the claim: International Associated Attorneys Ltd, §48.

46.  I accept, as Ms So contends, that the more serious the allegation, the less likely it is the event occurred, and hence the stronger the evidence has to be before the Court.

47.  Ms So places great emphases on the fact that the default judgments are still valid as of today and nobody has ever applied to set them aside. And Mr Zhang was a professional appointed by the Mainland Court. She submits that it is for Nanjing Hanen to show enough suspicious circumstances to say that there should be a trial. She emphasizes that the Court is not re-opening the underlying HC Actions, and an examination of the bona fides of the judgment debts is not trying the claims in the HC Actions. The examination exercise is different from establishing on a balance of probabilities to prove the claim. I bear these in mind when considering the next issue.

G. BONA FIDES ISSUE

48.  Mr Cheung’s complaints against the bona fides of the underlying debts could be broadly summarised as follows:

(1) There is a significant difference between the amounts allegedly transferred into HT Steel by Fengli HK and Ready Success, and the current amount in HT Steel’s bank account;

(2) There are suspicions surrounding the timing of the transfers made to HT Steel;

(3) There is a lack of objective and credible evidence to show a loan relationship;

(4) There are suspicions surrounding the alleged Debt Settlement Agreements; and

(5) The Judgment Creditors’ case has evolved over the affirmations filed.

G1. Difference between the amounts transferred and amounts sitting in HT Steel’s bank account

49.  Mr Cheung submits that if what the Judgment Creditors say is true and that the transfer of funds to HT Steel were to protect the safety of the funds and for the ease of management, there has been no explanation on the Judgment Creditors’ part to account for the significant difference between the amount allegedly transferred to HT Steel by the Judgment Creditors (around HK$25.6 million) and the current amount in the bank account of HT Steel (around HK$17.8 million), i.e. a difference of nearly HK$7.8 million.

50.  Ms So submits that the intra-group transfers have been taking place for a number of years until the garnishee (“BOCHK”) confirmed the bank balance to be about HK$17.8 in March 2022. During this period of time, various restructuring plans had been carried out. She draws my attention to various sections of the Restructuring Proposal, which state that the Fengli PRC Group would repay various debts in cash after obtaining the Mainland Court’s approval. As such, there must be some outgoings incurred, which accounted for the deficiency.

51.  In my view, I do not find the alleged difference of HK$7.8 million enough to cast doubt on the bona fides of the judgment debts. The Restructuring Proposal obviously anticipated a series of acts to be done in implementation. Accordingly, the drop in amount held by BOCHK, in itself, cannot assist Nanjing Hanen in showing suspicion concerning the judgment debts.

G2. Suspicions surrounding the timing of the transfers made to HT Steel

52.  Under the Judgment Creditors’ case, there were time gaps from the funds being transferred by the Judgment Creditors (beginning from 2016), to the execution of the Debt Settlement Agreements (in January 2017 and in December 2018), to the decision to use HT Steel as the repository of the funds (according to the WeChat messages, in or around June 2017), and to the change of bank signatories for HT Steel and Fengli HK (in July 2018). Mr Cheung complains that the time gaps cast serious doubts on the bona fides of the alleged loans:

(1) Notably, the Mandatory Restructuring Judgment was only concerned with the Mainland subsidiaries of Fengli PRC. It did not authorise EY or Mr Zhang to handle funds of companies outside the Mainland. Hence, it would be a red-herring to suggest that since the Mandatory Restructuring Judgment was handed down in August 2015, any intra-company transfer would be considered part of the restructuring process. Mr Zhang could only make a bare assertion that prior to RHF’s participation, the internal transfers were carried out between foreign companies (not subject to the re-organization) for the purpose of corporate re-organization.

(2) The decision to pool the Fengli Group’s funds into one company was only made in June 2017, supported by relevant discussions in WeChat messages. Thus, any attempt to explain the transfers prior to June 2017 with reference to a decision allegedly made in June 2017 only demonstrates the incredible nature of the Judgment Creditors’ case.

(3) Mr Zhang was only made a signatory of HT Steel and Fengli HK’s bank accounts in July 2018. He was not the “payment confirmor” for Ready Success’ bank account. No evidence has been adduced to show who authorised the transfers from Fengli HK and Ready Success to HT Steel.

53.  Mr Cheung submits that Mr Zhang is merely seeking to re-interpret the transactions in a way that benefits the Judgment Creditors.

54.  In response, Ms So submits that prior to 2016, intra-group transfers had already taken place and Fengli Group had already been operating in this way. In the course of restructuring which began in 2017, it would be perfectly reasonable that funds would be transferred between companies as they took in various subsidiaries as managers were exercising their powers. In gist, the timing point is not enough to show serious doubts as to the bona fides of the judgment debts.

55.  However, I do see force in Mr Cheung’s submissions. Based on the indorsements of claim in the HC Actions, it is the Judgment Creditors’ case that the loan arrangement had already been in place since 1 March 2016 (for Fengli HK) or 11 January 2016 (for Ready Success). If the decision to pool funds did only occur in June 2017, it seems quite odd that funds transferred prior to June 2017 could also be explained by an ex post facto decision. The suspicions arising from the time gaps are reasonable.

G3. No objective or credible evidence to show a genuine loan relationship

56.  As outlined at paragraphs 16 and 18 above, the causes of action of Fengli HK and Ready Success in the HC Actions were premised on loan relationships with HT Steel.

57.  The definition of a loan is well established and has been expounded by various authorities:

(1) A contract of loan of money is a contract whereby one person lends or agrees to lend a sum of money to another, in consideration of a promise express or implied to repay that sum on demand, or at a fixed or determinable future time, or conditionally upon an event which is bound to happen, with or without interest: Chitty on Contracts, 35^th edition, §42-271; Wong Lin Yau v Marcostar Limited, CACV 255/1996, 14 March 1997, p. 2, Godfrey JA.

(2) The presumption of an implied obligation to repay from the fact of payment to a stranger cannot be supported. The making of a bare payment to another may in the nature of things be explicable by reference to a wide variety of possibilities. The probability that there is an obligation to repay the amount is not so strong that it should become the subject of a presumption. It is preferable to avoid the making of a presumption and leave the character and effect of the payment to the drawing of inferences. Parties should be encouraged to present the totality of their case, particularly in cases arising out of commercial transactions: Big Island Construction (HK) Ltd v Wu Yi Development Co Ltd (2015) 18 HKCFAR 364, §106, Ribeiro PJ.

58.  Mr Cheung submits that, based on the authorities above, for a transaction to be legally classified as a loan, there must be both an initial advance and an obligation to repay (with or without interest). A loan without a repayment obligation is not in substance a loan. He submits that what Mr Zhang is doing is no more than an ex post facto re-categorization of the nature of the past transfers:

(1) The fact that the Judgment Creditors have adduced and exhibited transfer slips only serve to show the existence of transfer of funds rather than the existence of a loan relationship;

(2) The Judgment Creditors had presented the Court with tables of accounts (in the form of excel tables) purportedly showing the relevant fund-flow and nature of the transaction. Notably, in the accounts of Fengli HK and HT Steel, the transfers from Fengli HK to HT Steel were denoted as “ 划转”, instead of “loans”. The tables are no more than self-serving documents, the identity of whose makers being unknown.

(3) Apart from the excel tables, no audited reports of Fengli HK, Ready Success and HT Steel have been produced by the Judgment Creditors, showing the financial positions of the respective companies which were verified by an independent professional.

(4) In Zhang-1^st, Mr Zhang deposed that account receivables of Fengli HK from HT Steel included a sum of CNY71,131.62. In HCA 1014/2021, Fengli HK did not claim for this sum. This discrepancy was unaccounted for.

(5) The Judgment Creditors have adduced or produced evidence in a piecemeal fashion, which was inexplicable given that Nanjing Hanen has already raised its challenges to the genuineness and propriety of the judgment debts as early as in February 2022.

59.  In response, Ms So submits that the lack of contemporaneous records, such as no separate loan agreement available for each and every transfer of funds, does not give rise to suspicions in the present case, unlike the unexplained loan in the Kanematsu-Gosho case. Further, since each affirmation was filed for a different purpose, it was reasonable for different evidence to be produced in different affirmations. If anything, this showed that the Judgment Creditors were trying their best to answer Nanjing Hanen’s queries.

60.  In Zhang-4^th, Mr Zhang explained that:

(1) His primary objective as a manager was to preserve the assets of Fengli PRC Group and protecting its interests. As HT Steel was a company with “good record”, without being involved in litigation or in complicated accounts relating to numerous creditors, it would be prudent to pool all of Fengli Group’s funds into HT Steel for better administration.

(2) According to his understanding, the funds transferred from Fengli HK and Ready Success (and other subsidiaries) to HT Steel were in fact held by HT Steel on behalf of each and every company (實際上是由鴻泰 “代” 每家公司持有).

(3) Mr Zhang himself considers it rather meaningless to categorise this arrangement as a loan (將這安排描述為“貸款”或許沒有多大意義). Fengli HK or Ready Success did not lend to HT Steel pursuant to certain terms. However, obviously, the transfer of funds to HT Steel had implicated a repayment obligation on the part of HT Steel. The transfer of funds was only for the sake of better management and administration of Fengli Group’s assets.

61.  With respect, I do not accept that Ms So’s submissions or Zhang-4^th provide a good answer to Mr Cheung’s challenge.

62.  First, the general indorsements of claim in the HC Actions claimed for “amount loaned by and owing from” or “amount borrowed by and owing from” HT Steel. Any reasonable reader would have understood that the Judgment Creditors’ claims were based on loan relationships. Hence, to be satisfied with the bona fides of the judgment debts, the Court must be satisfied itself with the existence of such loan relationships.

63.  Second, in the present case, the evidence merely shows that there were transfers made to HT Steel. There were no terms eg as to when any loan was due for repayment, the number of instalments, or whether any interest would be charged (for overdue instalments). The complete silence on such terms casts doubt on whether a repayment obligation existed at all.

64.  Third, the absence of audited reports of Fengli HK and Ready Success also speaks volumes. The audited financial statements of the Judgment Creditors would be in the possession of the Judgment Creditors, who could have easily adduced them as evidence. An entry showing loans to HT Steel would dispel any doubt regarding the genuineness and propriety of the transfers.

65.  Fourth, Mr Zhang’s assertion that it would be meaningless to categorise the arrangements as “loans” comes as a surprise. After all, the entirety of Fengli HK and Ready Success’ claims is based on loan arrangements. As pointed out by Mr Cheung, it seems that Zhang-4^th was advancing an entirely different cause of action based on trustee-beneficiary relationship, which was not the lender–borrower relationship upon which the default judgments were entered. If it was the former relationship, the Judgment Creditors should have filed statements of claim setting out the bases of their claims to obtain default judgments under Order 13, rule 6 and, Order 19, rule 7 instead of under Order 13, rule 1 (which was what they did to obtain the default judgments against HT Steel).

66.  The suspicions arising from lack of objective or credible evidence to show a genuine loan relationships was reasonable.

G4. Suspicions surrounding the Debt Settlement Arrangements

67.  Mr Cheung’s complaints under this heading could be broadly summarised as follows:

(1) Zhang-1^st and Zhang-2^nd were filed in December 2020 and February 2021 respectively, for the purposes of making disclosures and opposing the Mareva injunction orders on behalf of Fengli HK. Those affirmations made no mention of the Debt Settlement Agreements.

(2) Mr Zhang (and RHF) understood that Fengli HK and HT Steel were joined as Chabra defendants under the Mareva injunction orders. If RHF had already entered into the Debt Settlement Agreements with WHD and WL, and seized control of their interests in HT Steel, it is difficult to see why RHF would not have represented HT Steel in opposing the continuation of the Mareva injunction orders.

(3) Clauses 1 of the Debt Settlement Agreements provided that RHF agreed not to take enforcement actions against WHD and WL in consideration of their agreeing to transfer to RHF all the shareholding, assets and choses in action in respect of related companies in their control. Despite Clauses 1, litigation was commenced by RHF against WHD and WL. Judgment against WHD was obtained in May 2019 for the principal sum of RMB100,000,000. Similarly, judgment against WL was obtained in August 2019 for the principal sum of RMB10,000,000. In both judgments, there were no mention of the Debt Settlement Agreements. This casts doubt on the authenticity of those Agreements.

(4) In response to the aforesaid complaint, Mr Zhang deposed in Zhang-4^th that:

“… [RHF] 在2018年向[WHD] 提出的訴訟是爲了對靖江法院早前先查扣的[WHD] 的財產參與分配 … … 而 2019 年向 [WL] 提出的訴訟僅僅為了走完有關程序… 換言而至，在簽訂有關的和解協議書後，我方的確沒有繼續向第一或第二被告人采取任何的司法執行程序或措施來追討有關的金額，只是在 [WHD] 及 [WL] 的知曉及同意下，運用法庭程序來完成債務重組及處理的一個步驟。...”(underlines added)

(5) Mr Cheung submits that, essentially, Mr Zhang admitted that RHF had initiated bogus claims in the Mainland without informing the Mainland Courts about the Debt Settlement Agreements. This would constitute an abuse of process.

68.  Ms So submits that the Mainland proceedings were not substantive enforcement proceedings but mechanistic step to get confirmation from the Court that there were no assets which a judgment creditor could levy execution on. It was done with the knowledge of WHD and WL and caused them no prejudice.

69.  On this complaint, whilst Ms So might be correct that different affirmations were filed for different purposes, with different considerations for a Chabra defendant to contest or not contest the continuation of the Mareva injunction, I find the explanation provided by Mr Zhang in respect of the enforcement actions against WHD and WL disturbing.

70.  On the face of the relevant judgments of the Mainland Court, the process appeared to all intent and purposes to be a true piece of litigation. RHF was suing on WHD and WL’s undertakings which guaranteed Fengli PRC Group’s liabilities in the Mainland Court. The Mainland Court had summoned WHD and WL and expected them to defend. The Mainland Court found against WHD and WL on such bases and enforced the undertakings (现融汇丰企业要求吴惠娣 / 吴立依《承诺书》偿还1亿 / 1000万元，有事实依据，本院予以支待。) That piece of litigation appeared to have directly contradicted the relevant terms of the Debt Settlement Agreements and it was not clear if the Mainland Court would have decided differently had it been told about the Debt Settlement Arrangement. The same judgment of the Mainland Court did not state that there were no assets on which a judgment creditor could levy execution. That litigation casts doubt on the genuineness of the Debt Settlement Agreements and, indirectly, on the purported loan relationships between the Judgment Creditors and HT Steel.

G5. Evolving cases in affirmations

71.  I agree with Mr Cheung’s submission that the Judgment Creditors’ case has changed and evolved over time:

(1) In Draft Zhang-3^rd, it was stated that, for the purpose of convenience and to implement the restructuring effectively, as well as to pool all the funds of Fengli Group together in a single bank account for easy management, RHF caused Fengli HK and Ready Success to transfer some of their funds to HT Steel pursuant to the Debt Settlement Agreements. After describing the transfers of the sums and exhibiting the relevant transfer records, Mr Zhang then asserted that he genuinely believed that HT Steel owed Fengli HK and Ready Success the relevant sums.

(2) In Zhang-3^rd, Mr Zhang affirmed further that the transfer of funds was made by way of loans.

“為更加有效執行《重整計畫》出資人權益調整方案及將豐立集團原本分散在多家關聯公司銀行帳戶的資金彙聚至同一家關聯公司的銀行帳戶以方便管理，融滙豐將根據該債務和解協議的授權將豐立香港及 Ready Success 持有的部分資金以貸款形式轉帳至鴻泰。”

The term “以貸款形式” was conspicuously absent in Draft Zhang Yu-3^rd.

(3) In Zhang-4^th, as mentioned in paragraph 60 (2) and (3) above, Mr Zhang downplayed the significance of re-categorizing the transactions as “loans” and described some kind of trustee-beneficiary relationship.

72.  The changing narratives in various affirmations of Mr Zhang do cast doubts as to whether a genuine loan relationship and repayment liability on HT Steel’s part existed in the first place.

73.  Further, Mr Cheung also complains that:

(1) The idea of “centralised storage of funds” in HT Steel contradicted directly the purpose stated by Mr Zhang in contemporaneous WeChat messages adduced by the Judgment Creditors, which indicated that the purpose of transferring funds to HT Steel was that HT Steel had to make certain payments. The Judgment Creditors have provided no explanation for the contradiction.

(2) It did not make commercial sense for Mr Zhang, in discharging his duties as the manager of the restructuring, to advance loans from Fengli HK and Ready Success to HT Steel in the hopes of preserving assets. This is because, in the event HT Steel was sued and filed for liquidation, the Judgment Creditors would become unsecured creditors with no priority over other potential creditors of HT Steel.

74.  Ms So stresses that Mr Zhang and EY have considered that HT Steel was a “litigation-free” or “clean-record” entity, which made it suitable to function as a repository for Fengli Group’s assets. However, this still does not answer the discrepancy between the stated purpose in the WeChat messages and that in the affirmations. More fundamentally, this does not answer why HT Steel will incur a repayment obligation if it were a repository for Fengli Group’s assets.

75.  Further, according to the approved Restructuring Proposal, under the section titled “重整计划的执行”, although the section mentioned about restructuring of the company group’s debts, nowhere did it mention transfer of all companies’ assets into one subsidiary’s bank account was for convenience or better administration.

76.  In summary, the Judgment Creditors do not have good answers to these challenges of Nanjing Hanen in Sections G2 – G5.

H. Exercise of discretion

77.  The Judgment Creditors say that the circumstances of this case do not feature a competing judgment creditor as against HT Steel (a judgment debtor). In exercising its discretion to do equity to all parties involved, Nanjing Hanen is not directly relevant in the sense that it has no relationship with HT Steel. Even to the extent that HT Steel is an asset associated with WHD and/or WL and hence an asset Nanjing Hanen as a judgment creditor may enforce against WHD and WL, fairness would not require deferring the making of the garnishee orders absolute. This is because Nanjing Hanen has obtained reliefs in respect of several other assets (including companies which have nothing to do with the HC Actions) identified to be under the ownership of WHD and WL. Afterall, Nanjing Hanen’s evidence filed is not specifically concerned with the garnishee order nisi but only on the Variation Summonses.

78.  I am unable to agree with Ms So. As there are enough suspicions concerning the judgment debts, the question of exercise of discretion to make the garnishee orders nisi absolute does not come into play. HT Steel’s assets were frozen on the basis that HT Steel was a Chabra defendant exercising control or power of disposition over the assets of WHD and WL. Those assets could be used to satisfy the debts of Nanjing Hanen. Nanjing Hanen is not yet in a position to decide what is the most cost-effective way to enforce its judgment when the other parties under the Mareva injunction (apart from, amongst others, Fengli HK) still fail to participate in the proceedings and comply with their discovery obligations. Nanjing Hanen should not be deprived of its opportunity to levy execution over the most certain asset (bank deposits) of HT Steel at this stage.

I. CONCLUSION AND DISPOSITION

79.  The challenges raised by Nanjing Hanen, taken individually cumulatively, do cast doubt on the bona fides of the judgment debts. The fact that Nanjing Hanen has not applied to set aside the default judgments, a point being repeatedly emphasized by Ms So, does not preclude the Court from investigating the bona fide of the judgment debts. In the premises, I decline to make the garnishee orders nisi absolute at this stage or to vary the Mareva injunction orders.

80.  During the hearing, I have consulted Ms So and Mr Cheung on the proper way forward in case I am not satisfied with the bona fides of the judgment debts. Ms So submits that Kanematsu-Gosho was instructive and that as challenger to the bona fides of the underlying judgment debts, Nanjing Hanen should set out its case first. Mr Cheung agrees to this course. I agree that this is the proper approach.

81.  I order as follows:

(1) Nanjing Hanen be joined as an intervener to the garnishee proceedings in HCA 1014/2021 and HCA 1601/2021;

(2) The Judgment Creditors be joined as an intervener to HCMP 1472/2020 and HCMP 1931/2020 for the purpose of the Variation Summonses;

(3) There be leave to Nanjing Hanen to file and serve its Points of Claim within [28] days of this judgment;

(4) There be leave to the Judgment Creditors to file and serve their respective Points of Defence within [28] days thereafter;

(5) There be leave to Nanjing Hanen to file and serve its Points of Reply within [28] days thereafter;

(6) Within [28] days after the filing of the Points of Reply, the parties shall jointly propose one set of further directions to the Court for the disposal of the garnishee proceedings. Any disagreement over directions shall be clearly identified, with concise reasons given;

(7) The garnishee proceedings in HCA 1014/2021, HCA 1601/2021 and the Variation Summonses in HCMP 1472/2020 and HCMP 1931/2020 be tried together before the same judge and be heard at the same time or immediately one after the other as the trial judge may direct;

(8) Evidence shall be mutually admissible in HCA 1014/2021 and in HCA 1601/2021;

(9) Liberty to apply.

82.  As the Judgment Creditors fail to make the garnishee orders absolute or vary the Mareva injunction orders on this occasion, Nanjing Hanen is the effective winner of this hearing. There is no reason why costs should not follow the event. On a nisi basis, costs of and occasioned by the hearing should be paid by the Judgment Creditors to Nanjing Hanen, with certificates for 2 counsel, summarily assessed and allowed at HK$700,000.

83.  I thank Ms So, Mr Cheung and Mr Lau for their assistance.