MARK CLINTON SHARP v. WONG CHI LIK, STEVEN AND ANOTHER

HCA 2215/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2215 OF 2008

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D E C I S I O N

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1.  This is an application to continue an interlocutory injunction, issued ex parte, by Suffiad J. on 7 November 2008.  The original injunction was to restrain the Mr Wong and Ms Chan from disposing of the sale proceeds of a property at King’s Park Hill Road, Kowloon, the sale having been due to be completed on 18 November 2008.

2.  Subsequent to the grant the injunction it was discovered that the sale of the property had taken place on 27 October 2008, three weeks prior to the contractual completion date for the sale.  Consequently, on the return day, 14 November 2008, Deputy High Court Judge Mayo varied the injunction, effectively converting it to a Mareva injunction, restraining the Defendants from disposing of their assets in Hong Kong up to the value of $4,962,914.35, that sum being the net sale proceeds of the property according to the information provided by the Mr Wong and Ms Chan.

3.  Now, Mr Sharp seeks to continue the injunction to trial, an application which is opposed.

4.  There is a strong arguable case of the part of Mr Sharp to say that the following constitute the relevant facts.

5.  Since late 1996, Mr Sharp and Mr Wong had carried on business in partnership.  At the same time each operated their own independent businesses, Mr Sharp, through a US entity known as WGN Sales, and Mr Wong, through an entity known as C&R Trading.  Although Mr Sharp says that Mr Wong told him that he owned C&R Trading, it now appears that Mr Wong is only a one third shareholder in that entity.

6.  The partnership operated in this way.  Mr Wong, through C&R Trading, used his Asian contacts to source and produce products, and Mr Sharp, through WGN Sales, used his US sales and US-based retail contacts to sell the products for a profit to US-based retailers.

7.  There seems no dispute that the parties would share equally in the expenses of costs for the goods sourced and sold according to this arrangement.  That is entirely logical.  That such expenses would include merchandise inspection fees, labour, freight and duty fees, laboratory tests, samples charges, warehouse rents, UPS charges, designed fees, sales commissions packing materials and packaging and printing costs is also entirely logical.

8.  But there is now a dispute as to the extent of the expenses that might properly be charged against the profits earned by the partnership.  Mr Wong now contends that what he describes as “indirect expenses” could also be charged to the partnership profits.  It is not yet clear just what Mr Wong considers constitute these indirect expenses.

9.  In 1997 and 1998 the business was financed by a Mrs Lee, the owner of a Taiwanese trading company called Asia Global.  The partnership of Mr Sharp and Mr Wong was run under the business name Asia Global.  Mrs Lee agreed to provide Mr Sharp and Mr Wong with an open line of credit of US$1 million at a cost of 2% per month.

10.  Unfortunately, a factory selected in 1999, to produce certain products failed to meet the requirements necessary for Mrs Lee to continue her financial support and the open line of credit was cancelled.

11.  It is the case for Mr Sharp, now disputed by Mr Wong, that Mr Sharp then agreed to leave his share of the profits from the sale of products from the previous year with Mr Wong as working capital for the partnership, so that the partnership did not have to resort to outside financial assistance.  Mr Sharp says, and Mr Wong denies, that Mr Wong was expressly told that the share of the profits were left with Mr Wong’s control only for use as operating capital and upon interest, eventually agreed, Mr Sharp says, and 3.5% per annum.

12.  Mr Sharp says that every year since 1999, Mr Wong provided him with a written account statement of all expenses incurred by Mr Wong for the joint partnership business.  Documents have been produced by Mr Sharp which purport to be those details.  Mr Wong now says that although his bookkeeper may have sent that information to Mr Sharp, he, Mr Wong, was quite unaware of that the information had been sent, and did not approve it in any way as purporting to constitute all the appropriate expenses.

13.  Mr Sharp says that he used that information to compile an annual income statement, which, together with the source documents showing sales and costs of sales in the US, enabled a pre-tax account to be prepared.  Mr Sharp says that those accounting documents were handed to Mr Wong each year on an annual visit made by Mr Sharp to Hong Kong.  Mr Sharp says the reports were never questioned by Mr Wong.  Mr Wong now denies receiving those reports.

14.  Mr Sharp says that in December 2007, Mr Wong admitted to him that he had spent all of Mr Sharp’s share of profits under his control on bad personal investments, family expenses, and on alleged company expenses which were not in fact for the partnership business.

15.  Mr Sharp says that a dinner meeting was called immediately, and held at a restaurant in Shenzhen.  He says that at that meeting Mr Wong tried to explain what he had done to drain all of Mr Sharp’s share of the profits, and that Mr Wong admitted guilt and asked for forgiveness.

16.  Mr Wong denies this conversation.  He admits the meeting, and asserts that Mr Sharp was told that his share of the profits could not be paid because “cash was very tight”.

17.  On 21 December 2007, Mr Wong e-mailed Mr Sharp in the following terms:

“Hello Mark,

Thanks for staying so long and everything.

I am sorry for what had happened that is not fair for you and your family.  I know I should tell you long time ago but I just didn’t.  Nothing I can say but sorry now.

I will do what I did as I said.  I am writing a letter for you so you can explain to Dee.  A) Sell the house and give you the money.  B) Will not change my insurance policy to your and Dee name (already did 8 years ago)…” (sic)

(Dee is Mr Sharp’s wife)

18.  Mr Wong does not deny e-mail but says that it was “written at (Mr Sharp’s) request to stop his wife worrying”.

19.  Subsequently, in January 2008, Mr Sharp met with Mr Wong, Ms Chan, (Mr Wong’s girlfriend), and Mr Wong’s brother, Danny Wong, in San Francisco.  There was a meeting at the Zeebec restaurant in the Radisson Hotel in San Francisco.  There according to the evidence of Mr Sharp’s solicitor, who has made the affidavits in support upon Mr Sharp’s instructions, Mr Sharp being in the USA, Mr Wong and Ms Chan, “on their own volition”, completed a document designed to give effect to the offer to sell his house contained in the e-mail.  The document is in the following terms:

“Re: 72 King’s Park Hill Road Kowloon, Hong Kong

We Steven Chi Lik Wong and Wai Ling Chan Iris owner of the above property will give all ownership of us to 1 Mark C Sharp then 2 Dee Sharp.  If we will sell the house then it will give Mark or Dee Sharp all the money (besides [owed to] the bank).” (sic)

The document is dated 4 January 2008 and is signed by both Mr Wong and Ms Chan.

20.  In addition, Mr Wong sent to Mr Sharp the paperwork that transferred ownership of Mr Wong’s New York life policy to Mr Sharp and his wife.  Suddenly Mr Sharp has learned that Mr Wong is no longer paying the premiums on the policy.

21.  Over the next months Mr Sharp repeatedly requested Mr Wong to provide a full set of financial banking documents to explain what had happened to the funds.  He also asked Mr Wong to inform them of progress on any prospective sale of the property.  In neither case did Mr Wong provide any constructive response. 

22.  At no stage did Mr Wong suggested, as he now does, that he did not know of all approve the accounting information but was sent to Mr Sharp, or that he had never received accounting documents from Mr Sharp, or that he was entitled to charge indirect expenses to the partnership account.  The suggestions did not arise until the affidavits were filed in this matter.

23.  Mr Sharp instructed solicitors who, on 30 September 2008, wrote to Mr Wong asking him to execute a deed of loan assigning his rights to the sale proceeds that might be received from the sale of the property, agreeing to continue to pay premiums on the life policy, and to make a full written account of all sums due and owing.

24.  On 13 October 2008, Mr Wong’s solicitors replied asking for supporting documents to justify Mr Sharp’s assertions, and reserving all Mr Wong’s rights including the right to defend against Mr Sharp’s claim.  This was the first occasion on which Mr Sharp learned that Mr Wong might be disputing the matter.  The solicitors did not, presumably on the instructions of Mr Wong, inform Mr Sharp’s solicitors that Mr Wong and Ms Chan had already entered into an agreement for sale and purchase to sell the property.  The fact of the sale was only discovered by Mr Sharp’s solicitors when conducting a land search on the property.

25.  In none of his affidavits, or by any submission of counsel, has Mr Wong attempted to explain why, in the light of the clear terms of the letter of 4 January 2008, he did not instructed solicitors to supply the information as to the sale to Mr Sharp.

26.  The affidavit filed for Mr Sharp asserts a good arguable case against Mr Wong on the basis of a constructive trust, money had and received, and contract.  A statement of claim has not yet been filed.

27.  The documentary evidence, and Mr Wong’s failure to raise any complaint at all until these proceedings were issued, all strongly supports Mr Sharp’s version of the facts.  I am satisfied that there is a strong arguable case that Mr Wong has misappropriated partnership funds for his own purposes, that he has admitted that to Mr Sharp, and that in consequence of that admission he has agreed that he will sell the residential property owned by himself and Ms Chan, and pay the net proceeds of sale thereof, after repayment of the bank loan, to Mr Sharp in recompense of the money misappropriated.

28.  Mr Beresford must be right when he says that the approach to the proceedings apparently adopted by Mr Sharp, that of a direct claim against Mr Wong for Mr Sharp’s share of the profits of the partnership based upon a constructive trust or breach of fiduciary duty is a flawed approach.  While there is a dispute between the parties as to the terms of the partnership, there appears to be no dispute that a partnership exist.  Before Mr Sharp can claim any sum from Mr Wong there must be an account in the partnership, to ascertain if any sum is due to Mr Sharp by the partnership: see Heybridge Ltd v Chan Sze Sze Gabrielle (unreported, CACV 172/2007, 28 September 2008). 

29.  That decision makes it abundantly clear that the proper primary cause of action to be pleaded by Mr Sharp should be for an account in the partnership. It would be open to plead a constructive trust or a breach of fiduciary duty in relation to any sums found to be due by the partnership to Mr Sharp if the accounting shows that they have been misappropriated by Mr Wong.

30.  But the precise course in which the proceedings must follow does not impact in any way upon the findings I have made as to a strong arguable case is set out in paragraph 27 above.  The statement of claim has a not yet been issued and I have no doubt that Mr Chang will advise Mr Sharp’s solicitors appropriately on the particular causes of action to be pleaded.

31.  Mr Beresford argued that Mr Sharp was not entitled to a Mareva injunction in the circumstances because he had no proprietary claim to the proceeds of sale of the property.  That is, technically, a correct statement of the law.  The following passage from Stephen Gee, Commercial Injunctions, 5^th Ed para 3.029 makes a position clear:

“A Mareva injunction is designed to protect the claimant against the dissipation of assets against which he might otherwise execute judgment whether immediately in the future.  It follows that Mareva relief is suitable only when the claimant’s claim is one which would result in his being able to enforce a judgement against the defendant’s assets.  If there is a claim to the assets themselves, the jurisdiction is not “Mareva” jurisdiction but an injunction granted in support of a proprietary interest and the court is more ready to make orders requiring the defendant estate where the assets are located in preserving those assets.”

32.  But that is not the end of the matter.  The same paragraph goes on to say:

“However, there are no constraints to the nature of the claimant’s cause of action or on the types of monetary relief which he may seek: his claim may be for payment of a debt, or damages, or an account, or even full statutory compensation.” (the emphasis is mine)

33.  I am satisfied that Mr Sharp has a strong arguable case for an account within the partnership, and that Mr Wong’s documentary acknowledgement to pay the proceeds of the sale of the house to Mr Sharp makes a strong arguable case that consequent upon that accounting, substantial sums will be payable by Mr Wong to Mr Sharp.  This is a case which I have no hesitation in saying, could well succeed at trial.

34.  As well as a strong arguable case for an account within the partnership, Mr Sharp has a strong arguable case for specific performance of the written document on 4 January 2008.  Mr Beresford attempted to argue that the use by Mr Sharp’s solicitor of the words “of their own volition” to describe the signing of that document by Mr Wong and Mr Chan indicated that there was no consideration for the transaction which was “voluntary”, or a gift.  The argument is untenable.  The expression was plainly used to indicate a free willingness, not under compulsion, and not as a “volunteer” in the sense that the law knows the maker of a gift.

35.  This is accordingly an appropriate case for a Mareva injunction.

36.  Mr Beresford’s insistence that the proper cause of action is for an account disposes of any potential limitation issue.  In actions for an account between partners, the limitation period does not run until the partnership is determined: see Halsbury 4^th Ed, (R), para 915.  On the evidence the earliest the partnership could have been determined, (if it has been determined), is December 2007, when the parties met in Shenzhen.

37.  I am satisfied that Mr Wong has assets within the jurisdiction.  The proceeds of sale, or at least what remains of them, are restrained by the injunction.

38.  Equally I am satisfied that there is a real risk of dissipation funds by Mr Wong.  First, Mr Wong has failed to explain why he did not instruct his solicitors to inform Mr Sharp of the contract that had been entered into for the sale of the property.  Irrespective of the ultimate outcome of any accounting, the fact that Mr Wong and Ms Chan had entered into the agreement to pay the proceeds of sale to Mr Sharp, placed upon them burden to keep Mr Sharp informed of progress in respect of any sale.  Mr Wong’s failure to disclose the fact of the sale and the completion date, either at the first available opportunity or when questions were raised by Mr Sharp’s solicitors is powerful evidence of bad faith on the part of Mr Wong and Ms Chan.  That bad faith justifies a finding of a risk of dissipation.

39.  Next, it appears from information supplied by Mr Wong that the net proceeds of sale of the property was some $3,800,000.  Just how Mr Wong and Ms Chan have dealt with those proceeds demonstrates a real risk of dissipation.  What can only be described as a quite extraordinary explanation as to the disposal of those proceeds is provided.

40.  Some $420,000 has gone to “a payment to factory”.  There is no proper explanation of these payments, for example which factory, or for which accounts, or the date when the alleged debts arose.  A sum of $2,328,300 was sent by Mr Wong to his partnership with his brother, to repay a bank loan, apparently owing by that partnership.  A further $128,900 was spent on “buying material and deposit”.  Again this expenditure is entirely unexplained. 

41.  Over $60,000 was spent on Mr Wong’s “new office”.  An otherwise unexplained $24,000 was spent by Mr Wong and Mr Chan on travel and China.  Mr Wong took the liberty of filling his car with petrol for $1500.  He paid for cleaning his new house and the old apartment.  Even more remarkably, money was spent on family birthday parties.

42.  Next, Mr Wong paid $271,000 to Ms Chan in purported repayment of a “loan” made by her, a loan which is quite undocumented and which had never been referred to before the alleged repayment.  Even more remarkably, over $700,000 was spent on buying shares on the stock exchange.

43.  It is difficult to imagine more powerful evidence to demonstrate a risk of dissipation.

44.  The balance of convenience favours the injunction.  Mr Sharp has a very strong case, and there is a very high risk of dissipation on the part of Mr Wong and Ms Chan.  I accept Mr Chang’s submission that in enjoining them from disposing of the proceeds other than by way of payment to Mr Sharp, is to do nothing more than that which they had promised to do, and consequently would not be of prejudice to them.

45.  For all these reasons I am satisfied that the Mareva injunction should continue until trial.

46.  Mr Beresford argues that the Mareva relief should not prevent Mr Wong and Ms Chan from paying ordinary business expenses or their ordinary living expenses.

47.  Other than a bare assertion that Mr Wong is starting a new business there is no proper evidence to substantiate a claim for ordinary business expenses.  In any event an examination for funds that he has already taken on the proceeds of sale tends to demonstrate that he has protected himself in this respect.

48.  An allowance has been made for $5,000 for living expenses.  There is no sufficient evidence to justify a greater sum.  Again, having regard to the personal expenditure already deducted by Mr Wong from the proceeds of sale there is no basis to justify an increase in this sum.

49.  Finally, Mr Beresford seeks fortification of the injunction.  For an application to fortify an undertaking to succeed a likelihood of a significant loss arising from a result of the injunction must be shown.  The evidence for Mr Wong and Ms Chan falls far short of showing any such likelihood other than a personal inconvenience in their day-to-day living.  There is no basis for an order requiring fortification of the injunction.

50.  Mr Chang asks for an order for a speedy trial.  That is entirely appropriate in this case.  I make the following orders:

(1) The statement of claim is to be filed within 14 days of today.

(2) The statement of defence is to be filed 14 days thereafter.

(3) Discovery of documents, by way of exchange of lists, is to take place 14 days after the close of pleadings.

(4) Inspection of discovered documents shall take place 7 days thereafter.

(5) The parties shall, 7 days after the inspection of discovered documents exchange witness statements. 

(6) A pre-trial review, 30 minutes allocated, is to be set down at 9:30 a.m. 7 days after the exchange of witness statements.

(7) Leave is reserved to apply in respect of the timetable order.

51.  There will be an order nisi that the costs of and incidental to the Defendants’ opposition to the continuation of the injunction, including the costs of the hearing on the 15^th of December 2008, be to the Plaintiff, in the cause.