MING HSIEH v. XU ZHE AND OTHERS

CACV 189/2015

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 189 OF 2015

(ON APPEAL FROM HCMP 3072 OF 2014)

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REASONS FOR JUDGMENT

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Hon Barma JA (giving the Reasons for Judgment of the Court):

1. This was an appeal by the defendants against the order of M Chan J dated 10 April 2015, by which the judge discharged an injunction order granted by Deputy High Court Judge Lok (as he then was) on 21 November 2014 pursuant to section 21M of the High Court Ordinance (Cap 4) against the 1^st to 4^th defendants, but re-granted a fresh injunction order in the same terms as the order of DHCJ Lok against the 1^st, 2^nd and 4^th defendants. The orders as originally made and as re-granted restrained the relevant defendants from disposing of or dealing with their assets in Hong Kong up to the value of US$54 million, and were in the nature of Mareva injunctions granted in aid of foreign proceedings brought in California, in the United States of America, by the plaintiff against the defendants (“the US Proceedings”).

2. As will be noted from the foregoing, the judge did not continue the injunction against the 3^rd defendant.  There is no appeal by the plaintiff against that aspect of her order.  Save in relation to an issue of costs, the 3^rd defendant has taken no part in this appeal.  References below to “the defendants” are accordingly (save where otherwise expressly stated) references to the 1^st, 2^nd and 4^th defendants only.

3. Following the hearing, judgment was reserved.  However, having regard to the fact that the injunction remained in place pending the delivery of judgment, this court gave judgment on 3 June 2016 (notified to the parties by letter of the same date) that the appeal was allowed, making a costs order nisi that the costs of the appeal and below were to be to the appellants (i.e. all the defendants, including the 3^rd defendant), to be taxed on the party and party basis with certificate for two counsel.  It was indicated that reasons for judgment would be handed down subsequently, and these are those reasons.

4. The background to this appeal can be summarised as follows:

(1)  On 6 November 2014, the plaintiff commenced the US Proceedings against all four defendants.

(2)  The complaint underlying the US Proceedings was that (according to the plaintiff) the 1^st and 2^nd defendants had made certain representations to the plaintiff in California, to induce the plaintiff to invest some RMB 350 million in a Chinese company called Antu Wangmin Changfu Agricultural Development Co Ltd (“WMCF”) in exchange for a 10% shareholding in WMCF.  The representations related to the financial position and profitability of WMCF, and to the use to which the plaintiff’s payment would be put, namely that it would be injected into WMCF.

(3)  The plaintiff alleges in reliance on the representations, a corporate vehicle owned by him (Antu Zelong Trading Ltd) entered into a Share Subscription Agreement dated 23 February 2011 with WMCF, and he paid US$54 million for investment into WMCF, by paying that sum to the 4^th defendant.  However, according to the plaintiff, the representations were false and were made fraudulently, in that the financial position and profitability of WMCF were not as represented, and not all of the funds paid by the plaintiff were injected into WMCF.

(4)  On the basis of these allegations, the plaintiff asserted four causes of action in the US Proceedings:

(a)  against the 1^st and 2^nd defendants, a claim for damages for fraud arising out of the misrepresentations made by them;

(b)  against the 1^st and 2^nd defendants, claims for damages for breach of certain US securities laws;

(c)  against the 1^st and 4^th defendants, a claim for damages for breach of contract, on the basis that there was an implied contract between the plaintiff and these defendants that the US$54 million would be injected into WMCF; and

(d)  against all four defendants, a claim based on alleged violations of the Racketeer Influence and Corrupt Organizations Act (“RICO”).

(5)  Importantly for present purposes, subsequent to the entry into of the Share Subscription Agreement and the payment of the US$54 million by the plaintiff to the 4^th defendant, the plaintiff entered into a number of agreements with a Madam Du, the mother of the 1^st defendant, who was said to be the majority beneficial owner of WMCF, none of which were disclosed to the Hong Kong court when the ex parte section 21M application was made.  These were a Buyback Agreement dated 4 August 2012, a Supplemental Agreement dated 14 November 2012 and a 2^nd Supplemental Agreement dated 2 July 2013.

(6)  The Supplemental Agreement recorded an agreement between the plaintiff and Madam Du to convert the plaintiff’s investment of RMB 350 million into an interest-bearing loan to Madam Du personally, and an agreement by the plaintiff that thenceforth he no longer had any shareholding or interest in WMCF.  The loan was secured by a guarantee from Furende, a jewellery company owned by Madam Du.

(7)  The 2^nd Supplemental Agreement recorded an agreement to cancel Furende’s guarantee, and an agreement by Furende instead to pledge all of its gold, jewellery and stock in trade to the plaintiff as security for Madam Du’s repayment of her debt assumed under the Supplemental Agreement.  Immediately after the entry into the 2^nd Supplemental Agreement, between 3 and 5 July 2013, the plaintiff took delivery of jewellery items from Furende with a book value of in excess of RMB 790 million, signing receipts for such jewellery in which the book value was acknowledged.

(8)  On 7 November 2014, the plaintiff obtained a Temporary Protective Order against the defendants’ California assets up to the value of US$54 million.  The TPO had the same effect as an asset freezing order (or Mareva injunction) in Hong Kong.

(9)  On the strength of having obtained the TPO, on 21 November 2014 the plaintiff applied for and obtained the section 21M injunction from DHCJ Lok.  The injunction was continued on the return date, until trial or further order.

(10)  In the US Proceedings, the TPO was extended until 3 March 2015.  Before its expiry, on 28 January 2015, the plaintiff applied for a Writ of Attachment in those proceedings, with a view to continuing the effect of the TPO.  However, on 26 February 2015, the court in California refused that application, which had been made in reliance on the implied contract claim only (it being, as we understand it, common ground that the US court did not have jurisdiction to grant such relief in connection with the other claims advanced by the plaintiff).  The extracts from the US court’s judgment cited in paragraphs 55 and 56 of the judgment below indicate that the reason for the refusal was that the US court was not satisfied, to the requisite standard under US law, of the validity of the plaintiff’s implied contract claim in the light of the Supplemental Agreement and the 2^nd Supplemental Agreement.

5. In the court below, the defendants contended that:

(1)  The plaintiff had been guilty of non disclosure in respect of four matters at the ex parte stage, so that the injunction should be discharged and should not be re-granted.  The four matters were:

(a)  that the plaintiff’s investment in WMCF involved the transfer to him or Antu Zelong of certain technology, and that the payment of RMB 350 million made by the plaintiff included an amount paid to Du for that transfer;

(b)  that the plaintiff’s investment in WMCF had subsequently been converted into a loan to Du by the Supplemental Agreement;

(c)  that such loan was secured by jewellery worth over RMB 790 million pledged and delivered to the plaintiff, as provided for in the 2^nd Supplemental Agreement; and

(d)  that the plaintiff had negotiated with Du and not the defendants throughout, and no representations were made by the defendants to the plaintiff in connection with his investment in WMCF.

(2)  The plaintiff had failed to demonstrate that it had a good arguable case for the grant of the injunctions, as:

(a)  the US court had declined to grant the Writ of Attachment, thus showing that the plaintiff did not have a good arguable case on the merits of its claims.  While accepting that the US court was only concerned with the implied contract claim in the context of the application for the Writ of Attachment, the defendants emphasised that all of the claims in the US proceedings were based on the same set of facts, and suggested that the position in this respect was the same for all the claims;

(b)  in any event, having regard to the fact that the plaintiff was in possession of Furende’s jewellery as security for the loan to Madam Du, which the plaintiff had acknowledged to be worth over RMB 790 million by having signed receipts for the same which described the jewellery as being of that value, the plaintiff could not show that it had actually suffered any loss, as the value of the jewellery far exceeded the amount of funds provided by the plaintiff.

(3)  It was unjust and inconvenient, within the meaning of section 21M(4), to continue the injunctions against the defendants, as:

(a)  the US court had refused the Writ of Attachment, which was equivalent to a freezing order in the context of the implied contract claim; and

(b)  the US court did not have jurisdiction to grant relief in the nature of a freezing order in respect of the other claims made by the plaintiff in the US Proceedings.

6. The judge did not accept that the plaintiff had been guilty of non-disclosure in the first and fourth respects mentioned in paragraph 5(1) above. However, she found that the plaintiff had failed to disclose the Supplemental Agreement or 2^nd Supplemental Agreement, and thus had been guilty of non-disclosure of the second and third matters there mentioned.  She also concluded that the non-disclosures were material – in particular, that the third matter was material because it was relevant to whether or not the injunction should be granted, and also to the extent of the injunction in terms of the extent of the defendants’ assets which it should cover (paragraph 47 of her judgment).  She therefore discharged the ex parte injunction granted by DHCJ Lok.  There is a dispute between the parties as to whether or not the judge found such non-disclosure to have been deliberate – the defendants say that she did (or must have done), but the plaintiff says she did not.  However, the judge came to the view that, notwithstanding the non-disclosures, which she said could not be described as “not serious” (paragraph 53 of her judgment), she should re-grant the injunction in the same terms as originally granted, as to refuse to do so would be a disproportionate response to the non-disclosure, having regard to what she considered to be many suspicious features of the dealings between the defendants and the plaintiff, and her view that the plaintiff had made out a good arguable case of fraud and of risk of dissipation of assets by the defendants (see the same paragraph of her judgment).

7. So far as a good arguable case was concerned, the judge took the view that a good arguable case of fraud had been established, and that this was so notwithstanding the decision of the US court in relation to the implied contract claim (paragraphs 58 and 59 of the judgment below).  It does not, however, appear that she went on to consider separately the question of what, if any, amount of damages might be awarded in respect of the claim.

8. Finally, the judge did not consider that the fact that the court had no jurisdiction to grant the relief apart from section 21M made it unjust or inconvenient to grant the relief sought, as she did not consider that making the order was inconsistent with or overlapped any order of the US court, and would not give rise to any disharmony or confusion, or of any risk of conflict of jurisdiction (see paragraphs 63 and 64 of her judgment).  She was also of the view that the US court had not considered the fraud claim when refusing the Writ of Attachment, and that it had, in any event, no jurisdiction to grant a freezing order in relation to that claim (or the other claims apart from the implied contract claim) (see paragraph 67 of the judgment below), and considered that in the light of all of these matters, there was no reason not to grant the relief sought, when she had earlier concluded that there was a good arguable case for granting it.

9. In this appeal, the defendants relied on three main grounds:

(1)  that the judge erred in concluding that the plaintiff had made out a good arguable case for the grant of the injunction – in support of this ground, emphasis was placed on:

(a)  the fact that the US court had declined to grant the Writ of Attachment in respect of the implied contract claim because it was not satisfied that the plaintiff had shown that it was likely to prevail on that claim in the light of the arguments as to the nature and effect of the Supplemental and 2^nd Supplemental Agreements; and

(b)  the provision of security by Furende in the form of the pledged jewellery said to be worth RMB 790 million as a matter which would impact on the amount of any damages that the plaintiff could recover, and which must therefore impact on the extent of the defendants’ assets which should be made subject to the injunction, if an injunction should be granted at all.

(2)  that the judge erred in deciding to re-grant the injunction notwithstanding the fact that the plaintiff had been guilty of material non-disclosure as found by the judge when applying for and obtaining the ex parte injunction – in support of this ground, the defendants stressed:

(a)  that the non-disclosure was (on the defendants’ case) deliberate; and

(b)  that it related to a very material matter, going as it did to whether or not the plaintiff had actually suffered the loss it claimed, or at least the extent of that loss, having regard to the plaintiff’s possession of the pledged jewellery, which was relevant to the extent of the assets to be covered by any freezing order that might be granted; and

(3)  that it was unjust and/or inconvenient, within the meaning of section 21M of the HCO to continue the injunction against the 1^st, 2^nd and 4^th defendants in that:

(a)  the US court had ruled, on the merits of the implied contract claim, that no freezing order Writ of Attachment should be granted in respect of that claim, and the other claims were based on substantially the same factual allegations; and

(b)  the US court’s lack of jurisdiction to grant freezing order relief in respect of the other claims was based on substantive considerations of US legal policy other than purely territorial grounds (i.e. a lack of jurisdiction to grant interim asset freezing orders against foreign parties, or foreign assets) and it was accordingly inexpedient to grant the relief sought under section 21M, as the grant by the Hong Kong court of relief in such circumstances would display a lack of comity, in that the Hong Kong court would be failing to accord proper respect for the legal policies adopted by the US courts.

10. In our view, this appeal can and should be resolved in the defendants’ favour by reference to the first of these grounds, and in particular to the contention put forward by the defendants in relation to the fact that the plaintiff had possession of Furende’s jewellery with a book value of in excess of RMB 790 million.

11. It is necessary to bear in mind that in considering whether or not a good arguable case for the granting of the injunction applied for has been made out, it is necessary to consider both liability and quantum.  Even if it can be shown to the necessary standard that the plaintiff is likely to make out its case on liability, it remains necessary to consider what the plaintiff is able to establish as to the likely level of damages to be awarded, as the injunction to be granted will be limited in its monetary extent by the latter issue.

12. In the present case, the parties differed on both issues of liability and quantum in the US Proceedings. So far as liability is concerned, the defendant says that the US court has held that the plaintiff has not been able to show (at this stage) that it is likely to prevail in relation to the implied contract claim and that it follows that the same must be true of the other claims, as they are based on the same facts.  The plaintiff, however, argues that this does not follow in relation to the other causes of action, which were not considered by the US court in the course of the Writ of Attachment application.  The plaintiff contends that the judge had concluded that the US court had not dealt with or expressed views as to the other causes of action, in particular the claim for fraud.

13. We are prepared to proceed, for present purposes, on the basis that the US court’s views as to the implied contract claim are not to be treated as an indication of its views as to the merits of the other claims, and in particular to assume that the doubts expressed as to whether or not the implied contract claim could survive the entry into of the two Supplemental Agreements would not apply to the fraud claim, so that the fraud claim would not be regarded as being extinguished by the entry into of those agreements.

14. However, in our view, it remains necessary to consider whether or not the level of damages that might be awarded would be such as to support an injunction of the extent applied for. In this case, there is no dispute that the plaintiff has in its possession jewellery belonging to Furende as security for the loans to Madam Du recorded in the Supplemental Agreements.  Whatever the impact of the making of the Supplemental Agreements may be on the viability of the implied contract claim, or the other claims, in terms of liability, it seems to us that the deposit of the jewellery pursuant to the 2^nd Supplemental Agreement must have an impact on the quantum of any damages that will ultimately be awarded, whatever the basis of liability.

15. While the judge may have been right to think that the fraud claim was not necessarily pre-empted by the two Supplemental Agreements (a matter which she rightly observed, in paragraph 67 of her judgment, was for the US court to decide), the fact remains that as a result of the Supplemental Agreements, the plaintiff was put in a position in which it could reduce the amount of its loss by the extent of the value of the jewellery pledged to it as security.  The judge appears to have taken the view that because the value of the jewellery was hotly disputed by the parties, this was not something that could be determined at this stage (although she also expressed reservations as to the true value of the jewellery having regard to the amount of Furende’s capital (some RMB 100,000), and the modest level of turnover it seemed to have achieved (some RMB 10,000 to 25,000 per month)), so that the jewellery could be treated as having no value, for the purposes of deciding on the extent of the injunction to be granted.

16. With respect, we are unable to agree with this approach.  The available evidence included the receipts for the jewellery which had been signed by the plaintiff.  Those receipts recorded the value of the jewellery to be in excess of RMB 790 million, approximately double the value of the advances made to WMCF.  While it would of course be open to the plaintiff to dispute the value of the jewellery, it seems to us that having taken possession of the jewellery, and having signed the receipts recording that value, it was incumbent on the plaintiff to put forward evidence on the basis of which it could be said that the value of the jewellery was not as stated in the receipts, but much less, putting forward a value that was supported by some such evidence as a valuation by a qualified valuer.  We do not think that it sufficed for the plaintiff to simply assert that the jewellery was valueless, nor was it enough to attempt to raise suspicions as to the or not the jewellery was as valuable as it was recorded to be on the basis of Furende’s financial records.  Even if there might be a basis for thinking that the value of the jewellery was less than RMB 790 million, it remained for the plaintiff to put forward a value for the jewellery, supported by appropriate valuation evidence, in order to establish the level of protection to which he might be entitled by way of the injunction sought. Having failed to do so, we are unable to agree that the plaintiff was entitled to an injunction to the extent of US$54 million.  Further, as no proper basis had been put forward by the plaintiff to justify the granting of an injunction of a lesser amount, we consider that the appropriate course to take would have been to refuse to re-grant the injunction altogether.

17. So far as the argument that the injunction should not have been re-granted because of the seriousness and allegedly deliberate nature of the non-disclosure is concerned, having regard to our conclusion above, it is not strictly necessary for us to express a concluded view as to this, and we will simply observe that the non-disclosure was one which (as will be apparent from the foregoing) went to one of the fundamental questions that needed to be considered in determining whether or not an injunction should be granted in the form and to the extent sought, and so was a serious matter which was not lightly to be overlooked.

18. As for the argument that it was unjust or inconvenient within the meaning of section 21M to continue the injunction, this too does not strictly have to be decided in the light of our conclusion on the first ground relied upon by the defendants, and having regard to the fact that the decision of this court in Compania Sud Americana de Vapores SA v Hin-Pro International Logistics Ltd [2015] 2 HKLRD 458 is under appeal to the Court of Final Appeal, we prefer not to express any view on this argument.

19. However, for the reasons explained above in relation to the first ground of appeal, we were satisfied that no fresh injunction should have been granted, and that the appeal should accordingly be allowed.

20. So far as costs are concerned, as the defendants succeeded in the appeal, we considered that the appropriate course to take was to make a costs order nisi that the plaintiff should pay to the defendants (including the 3^rd defendant) their costs here and below, to be taxed on the party and party basis if not agreed, with certificate for two counsel.