CHEUNG KAM WAH v. CHEUNG HON WAH AND OTHERS

HCA1208/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.1208 OF 2003

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DECISION

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INTRODUCTION

1. The plaintiff is a 50% shareholder and one of the two directors of Kammy Town Limited ("the Company"), a company engaged in the garment business. He commenced this derivative action on behalf of the Company against the 1st defendant (his younger brother), another 50% shareholder and the other director of the Company, the 2nd to 6th defendants, all ex-employees of the Company and the 7th and 8th defendants, rivals of the Company. He raised various complaints against the defendants, inter alia, as follows :

(1) As against the 1st defendant : He had, in breach of his fiduciary duties as the Company's director, (a) diverted business opportunities to the 7th and 8th defendants, corporate vehicles of his and the 2nd defendant; and (b) solicited the Company's employees to join the 7th defendant.

(2) As against the 2nd defendant : He had, in breach of his fiduciary duties as the Company's general manager, committed the same wrongdoings as the 1st defendant did. He had also dishonestly assisted the 1st defendant in the breach of his fiduciary duties as aforesaid.

(3) As against the 3rd defendant : She had, in breach of her fiduciary duties as a managerial staff member of the Company, solicited the Company's employees to join the 7th defendant.

(4) As against the 3rd to 6th defendants : They had dishonestly assisted the 1st and 2nd defendants in furtherance of their breach of fiduciary duties in converting business opportunities to the 7th defendant and soliciting the Company's employees to join the 7th defendant.

(5) As against the 7th and 8th defendants : They, as corporate vehicles of the 1st and 2nd defendant and under their control, dishonestly assisted them in breach of fiduciary duties as aforesaid.

(6) As against the 7th defendant : It had passed off its company and business as that connected with the Company and its business.

2. On 3 April 2003, the plaintiff applied for and obtained an ex parte injunction ("the Injunction") restraining :

(1) the 1st defendant from soliciting, entering into, performing or continuing to perform any contract with the customers of the Company as set out in Schedule C to the order, for the supply of woven garments otherwise than for the Company;

(2) the 7th and 8th defendants from soliciting, entering into, performing or continuing to perform any contract with the customers of the Company mentioned above for the supply of woven garments;

(3) the 2nd to 6th defendants from assisting or attempting to assist the 1st, 7th and 8th defendants in the prohibited dealings as aforesaid; and

(4) the 7th defendant from passing off the company or its business as or as connected in the course of business with the Company by, inter alia, the use of "Li Wah" or any name confusingly similar thereto.

3. On the return date (11 April 2003), the defendants gave undertakings in lieu of injunction. The plaintiff's inter partes summons dated 3 April 2003 for continuation of the Injunction was then adjourned for argument.

4. By a consent order dated 16 April 2003, the defendants' undertakings were varied to enable them to perform and complete existing purchase orders already placed by Next, one of the Company's customers referred to in Schedule C, with the 7th defendant. A subsequent application by the 7th defendant by summons dated 30 June 2003 to further vary the undertakings to enable the defendants to perform future orders to be placed by Next with the 7th defendant was withdrawn on 18 August 2003 with costs.

5. The plaintiff's inter partes summons eventually came before me. Content with his undertakings, the 1st defendant did not take part in the hearing before me. The other defendants opposed the plaintiff's application. They first took the point that the plaintiff was guilty of material non-disclosure. The attacks took two fronts. The first, common to all of them, is that the plaintiff had failed to make full and frank disclosure concerning his financial ability to honour his cross-undertaking as to damages. The second, relevant to the 7th defendant only, is that the plaintiff failed to disclose certain important matters which have a bearing on its passing off claim. Because of the material non-disclosure, the Injunction should be discharged forthwith and no fresh injunction should be granted. Alternatively, the 2nd to 8th defendants contended that there was no sufficient basis to continue the Injunction. Lastly, should the court continue the Injunction or grant a fresh injunction, the 2nd and 8th defendants (by summons dated 9 September 2003) and the 7th defendant (by summons dated 22 September 2003) applied for fortification of the plaintiff's cross-undertaking as to damages.

6. In light of the debate that took place before me, I have to determine the following questions in this Decision :

(1) Whether there was material non-disclosure as contended.

(2) If so, whether the Injunction should be discharged or continued.

(3) If the Injunction is to be discharged, should a fresh injunction be granted?

(4) If there was no material non-disclosure, should the Injunction be continued?

(5) If the Injunction is to be continued, whether or not there was material non-disclosure, or if a fresh injunction is granted, should the plaintiff provide fortification of his cross-undertaking as to damages?

(6) If so, what is the appropriate amount of fortification?

THE PARTIES

7. Back in 1977, the plaintiff and the 1st defendant formed a company called Li Wah Company ("LWC") as equal partners. Several years later, LWC began to trade in the garment business. In April 1989, the Company was incorporated with the plaintiff and the 1st defendant as equal shareholders and the only two directors to take over LWC's garment business. Garments have since been produced for the Company, as was the case for LWC since 1989, by a Li Wah Shi Mei Garment Factory situated in Shi Mei, Dongguan ("the Factory"). At all material times before the present disputes arose, the 1st defendant was responsible for the daily management and operation of the Company while the plaintiff devoted himself to the real estate investment business in the Mainland.

8. Over the years, the Company's business grew substantially. Its annual turnover exceeded HK$110 million for the financial year of 2001 2002 and increased to HK$136 million in the following financial year. The Company's produces are mainly ready-to-wear garments of which 70% are children wear. It exports its goods worldwide, in particular, to the United Kingdom, the United States and Europe mainly through overseas buyers' buying offices or agents in Hong Kong. The UK is its principal market, accounting for about 70% of its annual sales turnover. One of its major customers is Next, a famous retail group in the UK. Its local buying agent is Next (Asia) Limited.

9. As noted above, the 2nd to 6th defendants are all ex-employees of the Company. The plaintiff's case on their respective positions with the Company is this. The 2nd defendant joined the Company in April 1997. He had at all material times held a senior managerial position firstly as a sales director in April 2001 and subsequently as general manager since about 2001 up to his departure on 28 February 2003. The 3rd defendant joined the Company on 21 September 2001. She held a managerial position and was the 1st defendant's personal assistant. When she left on 17 March 2003, she was the head of the administration and finance department, responsible for all financial, accounting, personnel and administrative matters. The Company had four sales teams. Each of the 4th, 5th and 6th defendants was in charge of one of the teams until their respective departure on 5 March 2003 in the case of the 4th defendant and 28 February 2003 in the case of the 5th and 6th defendants. Since their departure, the 2nd to 6th defendants had all joined the 7th defendant.

10. The 7th defendant was formerly called Legend Century Development Limited. On 15 November 2002, it changed to the present name "Li Wah Garment (Dongguan) Limited". The 7th defendant's shareholders are and were at all material times Mr Leung Bun ("Mr Leung") and Ms Wong Oi Mei ("Ms Wong"). Ms Wong is the sister-in-law of the 1st defendant. The 8th defendant was purchased by the 1st defendant, the 2nd defendant and one Norman Cheng Nin Pui from its original shareholders in June 2001. On 26 September 2002, the 1st defendant transferred all his shares to Mr Leung. The two corporate defendants also engage in the garment business.

EVENTS LEADING TO THE INJUNCTION

11. According to the plaintiff, towards the end of the summer in 2002, a long serving messenger alerted him of certain irregular activities going on within the Company. With the assistance of his younger sister, Ms Cheung Lai Ming ("Ms Cheung"), the Company's sales assistant manager, Ms Sandy Tsang Yuen Mui ("Ms Tsang"), and a firm of accountants, the plaintiff conducted investigations into the Company's affairs. He queried the 1st defendant, who was uncooperative and evasive. As the Company's business was then running smoothly, the plaintiff did not take any action but just kept its affairs under observation. Events unfolded subsequently, giving rise to the plaintiff's various complaints, and in the end triggered the ex parte application for injunction.

(1) Alleged diversion of business opportunities

12. In about mid-March 2003, all of the Company's key customers, including Next, FILA and E-Style had completely stopped placing any orders, whether new or repeated, with the Company. According to the plaintiff, past experience suggested that by the end of March, expected orders for July in the region of at least HK$10 million would have been confirmed by the customers. Yet the Company only had orders worth about HK$160,000 on hand for that month. Initial search through the Company's computer records showed that the orders placed by Next were in fact cancelled. Some of the orders that the Factory had received bore reference numbers unrelated to the Company but apparently related to the 7th defendant.

13. On 27 March 2003, Ms Tsang and the plaintiff made an unannounced "blitz" visit to the Factory, only to find out that certain orders placed by Next and E-Style, worth no less than HK$843,000, had been cancelled and diverted to the 7th and 8th defendants; that both defendants were using the Factory to fulfil those orders and that some FILA orders with the Company had been cancelled and diverted to the 8th defendant.

14. The plaintiff complains that the 1st and 2nd defendants, in breach of their respective fiduciary duties as the Company's director and general manager, had wrongfully diverted the Company's business opportunities to the 7th and 8th defendants, which are but the 1st defendant's vehicles and controlled by the 1st and 2nd defendants.

(2) Soliciting staff to join the 7th defendant

15. The plaintiff alleges that the 1st to 3rd defendants orchestrated a mass exodus plan of staff from the Company to the 7th defendant, to be executed in stages from 28 February 2003 onwards.

16. Ms Tsang was approached by the 1st defendant or more than one occasion around the Chinese New Year in February 2003, urging her to leave the Company to join a new company. The 3rd defendant had also approached many staff members in about mid-February for the same purpose.

17. Ms Cheung had heard rumours that the Company's staff planning to quit. She approached the 4th defendant on 26 February 2003 who told her that she was leaving and upon request, tendered her resignation letter dated 13 February 2003 to take effect a month later. The 4th defendant further told Ms Cheung that she was quitting so that she could further her studies. She said she did not know if any of her subordinates was resigning as well.

18. During her investigations and searches of the Company's files in the latter part of March 2003, Ms Cheung found a hand-written document entitled "金利都徹离人員名單及時間安排", which the plaintiff says is a mass exodus plan written by the 1st defendant for the employees and departments identified to "evacuate" the Company. It involved three out of the four sales teams (headed by the 4th to 6th defendants respectively), practically the entire shipping department, the accounts department and the purchase department in their entirety. Some of the employees identified (including the 4th to 6th defendants) were to leave the Company in March, the rest in April. The plaintiff alleges that the 2nd and 3rd defendants had assisted in the plan. Although their names did not appear there, they were the first to hand in their resignation on 28 February 2003.

19. It is the plaintiff's case that the exodus plan had already been set in motion, as outlined below :

(1) On or about 1 March 2003, the 2nd, 5th and 6th defendants and two members of the 6th defendant's sales team left the Company. With the exception of the 2nd defendant's case, the plaintiff was not aware of the others' resignation letters until after they had quitted. Those resignation letters, dated between 27 January and 30 January 2003, were all kept in the Company's files.

(2) On or about 12 March 2003, the 4th defendant and two of her sales team members left the Company. The plaintiff did not know that the two team members had tendered their resignation letters, both dated 13 February 2003, until after their departure.

(3) In the last week of March 2003 (that is, after the 3rd defendant had left the Company), Ms Cheung found resignation letters of nine other employees in the 3rd defendant's office. Some had in fact tendered more than one resignation letter, though with different dates. Two of them formally handed in their notices of resignation on 21 March 2003. But none of these nine employees had, at the time of the ex parte application, left the Company.

(4) On 26 March 2003, Ms Cheung received three additional resignation letters respectively dated 1, 1 and 10 March 2003 from three of the employees identified in the plan. The resignations were to take effect one month later.

20. As aforesaid, all the 2nd to 6th defendants had subsequently joined the 7th defendant. Some of the employees who had quitted the Company as aforesaid had also joined the 7th defendant. It is the plaintiff's complaint that the departures of the 2nd to 6th defendants and other employees were executed according to the mass exodus plan, although the exact dates of departures differed slightly from what were stated in the plan.

(3) Alleged dishonest assistance to the 1st and 2nd defendants

21. The plaintiff complains that the 3rd to 6th defendants had rendered dishonest assistance to the 1st and 2nd defendants in breach of their fiduciary duties in diverting maturing business opportunities to the 7th and 8th defendants. Likewise, the 7th and 8th defendants had also dishonest assisted the 1st and 2nd defendants in such breach of duties.

(4) Passing off

22. The Company, according to the plaintiff, has substantial goodwill in the name "Li Wah". In support of his assertion, the plaintiff relies on a number of matters, including the following :

(1) Since its incorporation in 1989, the Company has continued to be closely associated with the name Li Wah, Li Wah Factory, and Li Wah Garment Factory. In fact, the Company and the Factory have a "symbiotic" relationship with each other. The Factory is its principal production base. Although the Company does not legally owned the Factory, it strictly controls the quality of the latter's products. Practically all of the Company's garments are manufactured there. Likewise practically all of the Factory's products are sold to the Company. The factory was set up by the Company and is financially dependent on the Company entirely. For more than 10 years, the Company has earned a strong reputation for quality garments made by the Factory.

(2) Overseas customers and their buying office representatives place much reliance on the quality of products and the management of the factories of garment exporters or suppliers (such as the Company) when they decide from whom they will order garments. They usually make inspection visits to the factories. In the Company's case, some of its customers, including Next, request company profiles from the Company as they want to have a thorough understanding of the manufacturing capacity, track record and product quality of the Company before placing any orders. The Factory is a real concern to these customers. When they visit the Factory, they see the name "Li Wah" at its entrance. They clearly associate the Company and the high quality of its garments with those names. They perceive the Company to stand behind the quality goods associated with those names.

(3) It can be seen from the Company's brochures to customer and potential customers that the goodwill in the name "Li Wah" is very much part of the Company's marketing strategy. The Company's success is built on such goodwill.

(4) The name cards of the Company's sales representatives bear a logo that is made of the two alphabets "L" and "W", short form for Li Wah, and put the names "Kammy Town Limited", "Li Wah Shi Mei Factory" alongside each other.

(5) An example of the importance the Company's customers perceive in the name "Li Wah" is that by a letter dated 10 March 2003, Next asked the plaintiff and the 1st defendant to sign a guarantee guaranteeing that the Next's orders would be manufactured by the Factory.

23. The plaintiff complains that the 7th defendant adopted its present name in order to associate it with the Factory, causing a lot of confusion amongst the Company's trading partners, who indirectly alerted the plaintiff to the 7th defendant's existence. The 7th defendant has ridden on the goodwill in the name "Li Wah" which belongs to the Company. By poaching a large proportion of the Company's staff, in particular, its sales teams, the 7th defendant has created an "identity crisis" and can readily market itself as the real "Li Wah" and pass off its business as or as connected with the original business of the Company. The 7th defendant's acts are calculated to lead and have indeed led to its business being confused with the Company's business, and to members of the trade and the public acquiring the goods of the 7th defendant in the belief that they are acquiring the goods of the Company or trading with the Company or with a business connected in the course of business with the Company.

24. The plaintiff, assisted by Ms Cheung, had come across some email exchanges in February 2003, which indicated that Next was considering changing their supplier code for the Company to "Li Wah GMT Dongguan", an apparent reference to the 7th defendant and that bookings placed by Next with "Li Wah GMT Dongguan" had been agreed and that the supplier would be Li Wah. The Company had not authorised such exchanges or representations by its staff. Because of the matters complained of, a large number of orders in respect of CHANAL and some orders with Next had been cancelled recently. These orders were originally handled by the 4th defendant, who now works for the 7th defendant.

25. On the strength of the above complaints, the plaintiff applied for and obtained the Injunction.

THE PLAINTIFF'S FINANCIAL ABILITY

26. Having set the backdrop, I now address the first question of material non-disclosure. I first deal with the plaintiff's financial ability.

(1) The law

27. The law in this area is well established. The relevant principles may be summarised as follows :

(1) The duty of an applicant for ex parte relief to make full and frank disclosure of his financial ability to honour his cross-undertaking as to damages is part and partial of his general duty to make full and frank disclosure of all matters relevant to the court's weighing operation whether or not to grant the relief.

(2) In general, it is strongly advisable for this matter to be expressly dealt with in the evidence in support of the ex parte application.

(3) When a plaintiff simply gives a cross-undertaking and says nothing more, the court will take the plaintiff to have impliedly represented that his financial position allows him to make good his undertaking when called upon to do so : Manor Electronics Ltd v. Dickson [1988] PRC 618, per Scott J at p.623, followed by the Court of Appeal in New Asia Energy v. Concord Oil (Hong Kong) Ltd [2000] 1 HKC 681.

(4) If, however, the plaintiff's financial position is such that, viewed fairly, it may be said to raise realistic doubts as to his ability to honour the cross-undertaking, it becomes incumbent upon the plaintiff to make full and frank disclosure of his financial position to the ex parte judge so as to permit the judge to determine for himself the correct order to make in the light of such disclosures. The judge in such cases has various options. He may consider it proper to refuse the injunction altogether. Or, he may decide to require some degree of fortification of the cross-undertaking as a condition for the grant of the injunction. Alternatively, he may simply decide to grant the injunction against the cross-undertaking notwithstanding the risk that it may not be honoured or fully honoured if called upon. It is however crucial that all the relevant material be placed before the judge so that he can make the decision for himself : Lock International plc v. Beswick [1989] 1 WLR 1268 at p.1279C, applied in Wah Nam Holdings Co. Ltd v. Excel Noble Development Ltd [2000] 3 HKC 118 at p.129C-F.

(5) If the facts were such that the plaintiff came under such a duty to make disclosure and he had failed to do so, the injunction is normally discharged without going into the merits : Manor Electronics Ltd v. Dickson [1988] RPC 618 at p.624.

(6) It is not open to the plaintiff to argue that the inter partes judge should have undertaken an assessment of the merits of the plaintiff's case with a view to absolving him from providing an undertaking or from the consequences of any non-disclosure, or with a view to assessing the likelihood of the undertaking being called up. Such a contention turns the principle on its head. It is plainly inappropriate to try to determine the merits at the interlocutory stage when the evidence has not been fully developed, discovery has not yet occurred and the legal advisers are not fully instructed on the merits of the case, making it inevitable that there will be gaps in the affidavits. The court is only concerned at that stage in trying to determine how the status quo can most fairly be preserved pending trial : Wah Nam Holdings Co. Ltd v. Excel Noble Development Ltd [2000] 3 HKC 118 at p.126D-G.

(7) Nor does it avail the plaintiff who has failed in such a duty of disclosure to contend that his non-disclosure was inadvertent; or that if the ex parte judge had been told of the financial difficulties, he would nonetheless have granted the ex parte injunction; or that from a close analysis and calculation of his actual worth that he probably could meet any potential liability; or that he should be excused the non-disclosure because the ex parte order has brone out, showing the defendant in bad light : Wah Nam Holdings Co. Ltd v. Excel Noble Development Ltd [2000] 3 HKC 118 at pp.129F-130D.

28. With these principles in mind, I turn to consider if the plaintiff has failed to make full and frank disclosure on his financial position as contended by the defendants. I begin with the evidence adduced by the plaintiff before the ex parte judge concerning his financial position.

(2) The plaintiff's evidence before the ex parte judge

29. In paragraph 134 of his first affirmation filed on 2 April 2003 in support of the ex parte application, the plaintiff averred that he had substantial assets within Hong Kong and in the Mainland to make good his undertaking as to damages, including :

(1) 70% shareholding in Li Wah HK Guangdong Transportation Company ("Li Wah Transportation"), which had a value of HK$1.4 million; and

(2) 70% shareholding in Caming Development Ltd ("Caming"), which held 89% of the share capital in Huangpu Caming Real Estate Development Ltd ("Guangzhou Caming"). The 70% shares had a value of RMB62.3 million.

30. The plaintiff had not elaborated on the basis upon which the value of the assets was based. Nor had he exhibited any documentary evidence to substantiate his assertions. What he did was he supplemented his affidavit evidence by oral testimony, in which he dealt with three groups of assets : (1) landed property; (2) bank accounts and (3) interests in various companies thus :

(1) On landed property, his evidence is that he resides at the property owned by Ms Cheung. He does not have any beneficial interest in it. Other than a commercial property known as Flat D, 2/F, Singwa Commercial Building, Nos.26-30 Parkes Street, he does not own any landed property in Hong Kong. The commercial property is registered in the joint names of the plaintiff, Ms Cheung and the 1st defendant but the plaintiff is the sole beneficial owner. The property is estimated to have a value of about HK$1.2 million. But as it is fully mortgaged, there is no net worth. Further, the plaintiff has a property in California, USA with an estimated value of US$350,000 but mortgaged up to US$130,000.

(2) On his bank accounts, he said that he only has three bank accounts at : (a) HSBC with HK$80,000; (b) Hang Seng Bank with less than HK$80,000 and (c) National Commercial Bank with less than US$16,000.

(3) On his interests in various companies, he confirmed his shareholdings in the Company (50%), Li Wah Transportation (70%) and Caming (70%). He elaborated his interest in Li Wah Transportation further in this way. Li Wah Transportation owned PRC vehicle licences. The value of such licences, being intangible, was not reflected in the set of accounts for Li Wah Transportation for the year ended 31 March 2002, which state that the worth of its nets assets to be HK$531,204.97. The company was worth about HK$2 million, which was in fact an offer made by a Wing Yiu Cheung Trading Company recently to buy out the company. He therefore estimated the worth of his 70% shareholding at about HK$1.4 million. Turning to Caming, the plaintiff said that the company owned a piece of land at No.18, Lai Heung Road, Guangzhou City on which houses were built ("the Project"). Both the land and the houses were registered in the name of Guangzhou Caming but they belonged to Caming beneficially. Eight houses were mortgaged under his personal name.

31. It was at this point that the ex parte judge intervened. Apparently, he was not satisfied with the plaintiff's evidence thus far. For he had this to say:

"What's in the affidavit is painfully inadequate. What has so far come out in over half an hour of evidence has not really improved on that scenario. I need to know, if this man's application goes bad, that he's good for the money that the defendants are going to lose because of it."

32. In the ensuing submissions, it transpired that senior counsel then representing the plaintiff had apparently asked the ex parte judge to disregard the plaintiff's interest in Caming at the outset of the application because they had not still ascertained the worth of the company. But he left the matter to the court. The judge then went on to ask the plaintiff questions about the worth of Caming, which was the focus of his inquiry. The plaintiff confirmed that the total value of the property that Guangzhou Caming owned was about RMB100 million. The approximate worth was justified "because the local authority for making estimation is able to provide estimate report in that regard." Obviously, the judge must have taken into account the plaintiff's interest in Caming when considering his cross-undertaking as to damages. Despite his initial concerns, he was apparently satisfied with the plaintiff's financial ability after hearing his oral testimony.

(3) The GNYV Report

33. After the ex parte hearing and upon the request of the 2nd defendant, the plaintiff's solicitors supplied a valuation report dated 7 April 2003 prepared by a Mainland expert, Guangdong Nan Yue Valuation Co. Ltd ("GNVY" and "the GNYV Report") to justify the value of the Project put forward before the ex parte judge. GNYV adopted two methods in arriving at the estimated value of the undeveloped land, namely, "基準地價法" and "假設開發法". For the former method, GNYV applied the relevant regulations, made certain adjustments on the valuation components and arrived at RMB99,697,568. The second method took into account comparables, construction costs and profit margin of development. The figure arrived at was RMB89,863,703. Taking the average, GNYV estimated the market value of the undeveloped land in the Project at RMB94,780,635 as at 3 April 2003, a figure more or less consistent with the plaintiff's evidence adduced before the ex parte judge.

34. The 2nd defendant does not agree with the valuation done by GNYV. He exhibited to his supplemental affirmation filed on 5 September 2003 a valuation report dated 8 July 2003 prepared by one Dudley Surveyors Limited ("DSL" and "the DSL Report"). Unlike the plaintiff's expert, DSL just took into account of a number of comparables and after making the necessary comparison and adjustments, stated that "the current market value of the site, assuming a cleared site and vacant possession basis, and free from all legal encumbrances is in the order of RMB30,670,000 or HK$28,930,000 (taking an exchange rate HK$1 = RMB1.06)". That is less than one-third of the valuation by GNVY. Counsel spent some time debating which report should be preferred, GNYV and DSL having used different approaches to valuation. For present purposes, I am prepared to accept the submission of Mr Chan, counsel for the plaintiff, that the GNYV Report is to be preferred. The Project is situated in the Mainland. A Mainland expert, GNYV is apparently better placed than DSL in terms of local knowledge and expertise when it comes to valuation of landed property in the Mainland.

(4) Matters not disclosed

35. At the ex parte stage, the plaintiff primarily relied on Guangzhou Caming's financial worth to support his ability to honour the cross-undertaking. This remains the case before me. However, it is now not in dispute that the plaintiff has not made disclosure of a number of matters relating to Guzngzhou Caming to the ex parte judge. The question is whether the plaintiff's financial position is such that, viewed fairly in light of these matters which shed more light on the financial worth of Guangzhou Caming, it may be said to raise realistic doubts as to his ability to honour the cross-undertaking. If so, the plaintiff will then be guilty of material non-disclosure. These undisclosed matters are set out below.

(a) Project not fully developed

36. The first matter not disclosed is the fact that only two residential buildings in the entire Project have been completed, contrary to the assumption made in the GNYV Report that the estate development would be completed. However, Mr Chan submitted that GNYV was evaluating the value of the undeveloped land in the Project. Thus the extent of the actual development would be irrelevant. I agree and find that it is not a matter that requires disclosure.

(b) Outstanding premium

37. The second matter not disclosed is related to GNYV's another assumption, namely, all the land premium of the land had been fully paid up : see paragraph 2 of Section 3 of the GNYV Report. But the plaintiff now admits that the premium was not fully paid up until July 2003, as revealed by the notice of confirmation issued by the relevant Guangzhou authority dated 23 July 2003 (Exhibit "CKW-37" to the plaintiff's supplemental (5th) affirmation filed on 23 September 2003). The total premium was in the region of RMB21 million, some RMB14 million of which was paid back in 1994. The balance of about RMB7.8 million was only paid in July 2003. In other words, about one-third of the premium, which was significant in terms of both percentage and quantum, was outstanding at the ex parte stage. One wonders if any meaningful valuation could have ever been done at the ex parte stage in light of the sizable premium then outstanding. Even if a meaningful valuation could have been carried out, the estimated value must have been considerably lower than the figure that CNYV came up with or what the plaintiff had boldly asserted before the ex parte judge.

(c) Penalty for late payment of premium

38. The third matter not disclosed is that penalty for late payment of the premium remains payable. The Guangzhou land authority had stated in the Notice that penalty for late payment of the premium would be dealt with later. According to the contract between the Guangzhou land authority and Guangzhou Caming dated 30 November 1992, the premium was to be paid by two equal instalments in 1992. The last instalment is due on 28 February 1992. In the event of late payment, the land authority was entitled to terminate the contract, or alternatively while continuing with the contract, to charge penalty for late payment calculated at the daily rate of 1% of the balance due. The penalty, if levied, would be enormous.

(d) Outstanding judgment

39. The fourth matter not disclosed is an outstanding judgment against Guangzhou Caming. In 1999, Guangzhou Caming was sued by Guangzhou City No.3 Construction Company Limited contracted to build the two residential buildings for the Project for outstanding construction fees. Guangzhou Caming lost the lawsuit and the subsequent appeal. By a judgment dated 5 April 2001 of the Higher People's Court of Guangdong Province, Guangzhou Caming was ordered to pay some RMB11.5 million to the contractor.

40. In paragraph 4 of his 4th affirmation filed on 20 September 2003, the plaintiff averred that the judgment had already been satisfied by payments and set off of the counterclaim by Guangzhou Caming. According to the documents the plaintiff relied on (Exhibit "CKW-34"), the balance due from Guangzhou Caming to the contractor was in the region of RMB6.8 million, although Guangzhou had paid a total of RMB7.3 million to the contractor. As at 3 April 2003, Guangzhou had paid only RMB3.2 million. The balance of RMB4.1 million was paid by instalments thereafter. In other words, a considerable part of the judgment was indeed outstanding at the ex parte stage.

(e) Guangzhou Caming's accounts

41. The fifth matter not disclosed related to the audited financial statement of Guangzhou Caming for the year ended 31 December 2001 (dated 9 March 2002). Accordingly to this statement, the net assets of Guangzhou Caming as at 31 December 2001 was about RMB52 million, which comprised of aggregate amounts of receivables of some RMB30 million. The loss for the same period was RMB2,789,429.12 with accumulated loss of more than RMB25 million. Attached to the aforesaid statement is a "Report on application for annual examination of business licence" submitted by Guangzhou Caming to the Guangzhou authority on 21 May 2002. Guangzhou Caming admitted in this report that it was experiencing financial difficulty. Since the commencement of the construction of the Project in August 1993, of all the planned developments, only two residential buildings had been built. Guangzhou Caming did not have the financial resources to install permanent water and electricity in those two buildings, thus causing it to fail its annual business licence examination. Guangzhou Caming begged for indulgence and asked the annual licence be granted. The plaintiff has not adduced any updated accounts to show that Guangzhou Caming's financial position has since been improved.

(5) Realistic doubts on the plaintiff's financial ability

42. All these undisclosed matters (except the extent of development) shed important light on the overall financial position of Guangzhou Caming as at the ex parte stage. A fuller picture now emerges. It could not have been as rosy as the plaintiff had tried to portray before the ex parte judge. The estimated value of the Project, the only major asset that Guangzhou Caming had, had been overstated, to say the least. With one third of the premium outstanding, the figure of about RMB100 million could not stand. On its liabilities, Guangzhou Caming owed some its contractor some RMB4.1 million, being the balance of a judgment debt. As at 2002, Guangzhou Caming was facing financial difficulty to such an extent that it could not complete the Project and to install the two finished buildings with water and electricity supply. No evidence has been adduced to suggest any improvement as at April 2003. Worse still, because of the outstanding premium, it has all along been exposed to potential liability to pay hefty penalty. All these matters, when taking into account collectively, must have cast serious, realistic doubts on the overall financial position of Guangzhou Caming, which the plaintiff relied principally on to make good his case on his ability to honour the cross-undertaking. It is therefore incumbent on the plaintiff to make full and frank disclosure of all of them to the ex parte judge. This is especially so when the judge had expressly raised doubts on the plaintiff's financial worth and embarked on questioning the plaintiff himself on the financial position of Guangzhou Caming.

(6) Reasons for non-disclosure

43. The plaintiff sought to justify the non-disclosure on a number of grounds.

44. On the outstanding premium, in none of his affirmations filed thus far had the plaintiff explained why he had not made the disclosure to the ex parte judge. The explanation came from Ms Cheung who said in paragraph 4 of her 8th affirmation filed on 13 November 2003 :

"I am told that the plaintiff firmly believed all along and still believes that he has more than enough means to support his cross undertaking as to damages and did all he could given the shortage of time and urgency of the matter, to provide the best information on his projects at the ex-parte stage, and was always willing to assist the Court. There were huge volumes of accounts and record on the [Project] and on those buildings completed. I am told that the plaintiff did not think it would help the Court in evaluating the question of his worth in relation to the cross undertaking as to damages. He has no intention to omit anything or hide anything from the Court as to his own financial means."

45. This is essentially a plea of inadvertence. In my view, it is but a lame excuse for a number of reasons. First, the plaintiff's belief that he had more than sufficient means to honour his cross-undertaking at the ex parte stage was obviously premised on the value of the Project. With the value of the Project as at the ex parte stage now in serious doubt, such belief is clearly not maintainable any more. Second, the assertion that he had already done his best in light of the shortage of time and urgency of the matter is untenable. There is no suggestion that he was not aware of the outstanding premium at the time. Indeed, that would have hardly skipped the plaintiff's mind. He might not be able to come up with the exact figure of the premium then outstanding. But he should be able to give a realistic and genuine estimate without going through the relevant documents. Third, the assertion that the documents relating to the premium were voluminous is contradicted by the number of the relevant documents now adduced by him. Finally, such a plea of inadvertence is in any event not maintainable as a matter of law : see paragraph 27(7) above.

46. Mr Chan took a further point on the outstanding premium. He submitted that having paid the bulk of the premium many years ago, the plaintiff could not have thought that in April 2003 when applying urgently for the Injunction, that the outstanding balance would be relevant at all, when the shortage was only RMB7 million and the value of the un-built part of the land was, at least on his experts' view, worth about RMB90 million. With respect, I disagree. This submission is contrary to authority. Materiality is an objective one. It is not for the plaintiff or indeed his legal advisers to decide the question. It is no excuse for the plaintiff to say that he was genuinely unaware, or did not believe the outstanding premium was relevant or important. Further, I am unable to accept the submission that the shortage of the premium (RMB7.8 million) was insignificant when compared to the value of the Project (RMB94 million). It ignores the fact that GNYVs' valuation was based on the assumption that all premium had been fully paid up. With one-third of the premium remained outstanding, the estimated value of RMB 94 million simply could not stand.

47. In my view, it is not just a case of material non-disclosure of the outstanding premium. It is a case of misrepresentation. At the outset of the ex parte hearing, senior counsel had asked the judge not to give weight to the value of the plaintiff's shareholding in Caming because the value of the company had yet to be ascertained. Caming owned shares in Guangzhou Caming. And the only substantial asset that Guangzhou Caming had at the time was the Project. In short, senior counsel must have the Project in mind when he said they had not yet ascertained the value of Caming. The value of the Project then became the focus of inquiry by the ex parte judge with the plaintiff. The plaintiff must be aware that the premium was outstanding and that it had an adverse impact on the value of the Project. He could not have asserted on oath that it was in the region of RMB 100 million when he well knew that the figure was simply not maintainable. Yet he chose to do so and had thereby misled the ex parte judge.

48. On the penalty for late payment of premium, Mr Chan submitted that the practical risk of the Guangzhou authority imposing substantial penalty must all along have been too remote to be worthy of the weighing scale, or at least so to the plaintiff's undertaking, because the authority had never imposed such penalty in the past or threatened to do so in the future. Again, the plaintiff's subjective assessment is irrelevant. I accept that there is no evidence to show that the land authority had in the past imposed penalty for late payment. But as demonstrated by the express reservation in the Notice, the liability to pay penalty, viewed objectively, must have remained a potential and not fanciful liability at all material times which Guangzhou Caming would have to meet, if called upon to do so. The penalty, given its enormous size, would seriously affect Guangzhou Caming's overall financial position. It could not be brushed aside.

49. On the outstanding judgment, the plaintiff had little to say except that there is no question of any enforcement proceedings : see paragraph 4 of his 4th affirmation filed on 20 September 2003. As I have pointed out in paragraph 40 above, the outstanding judgment must have an adverse impact of Guangzhou's overall financial position. There is no reason why it was not disclosed.

50. On the financial statement of Guangzhou Caming and the report attached thereto, Mr Chan submitted that the plaintiff's financial worth far exceeded any possible damages that the defendants might suffer. The entries in the accounts could not have diminished the estimate of the plaintiff's personal worth nor weighed in the weighing scale before the ex parte judge. Both the ex parte and inter partes applications should not be turned into a tedious down to detail investigation as to the exact worth of the plaintiff to the last dollar. Again, Mr Chan's submission is contrary to authority. It is not an excuse for material non-disclosure to say that from a close analysis and calculation of his actual worth, the plaintiff probably could meet any potential liability : see paragraph 27(7) above. Further, I accept the submission of Mr Yuen, SC, counsel for the 7th defendant that these matters were highly relevant because Guangzhou Caming's poor financial circumstances would throw doubt on its ability to complete the Project, which in turn is material in respect of the value of the Project.

(7) Conclusion

51. For the above reasons, I see no justification at all why the plaintiff did not make disclosure of the matters complained of (except the extent of the Project's development). He is guilty of material non-disclosure. He is also guilty of misrepresenting to the ex parte judge the value of the Project and hence indirectly the value of his shares in Caming.

52. I will come back to the order that I should make in these circumstances in a moment. I will first dispose of with the 7th defendant's complaint of material non-disclosure in relation to the plaintiff's claim of passing off.

PASSING OFF

53. Mr Yuen submitted that one of the key issues is whether the Company owns the Factory. It would appear that the plaintiff's case is that the Company owns the Factory, which is denied by the 7th defendant. He complained that the plaintiff had not only failed to produce any documentary evidence to show ownership but had also failed to disclose documents that tend to rebut the alleged ownership. Such documents are (a) the processing agreement dated 23 January 1989 between the Factory and LWC and (b) the partnership agreement dated 22 December 1988 between the Factory and LWC. (Mr Yuen stated in his written submission that this partnership agreement was between the Factory and the Company, citing the reference to it in the recital of an agreement made between the plaintiff, the 1st defendant, Next and the 7th defendant dated 15 April 2003 in connection with the performance of Next's existing orders by the 7th defendant. This must be wrong. The relevant paragraph in the recital stated that the partnership agreement was between LWC and the Company.)

54. The plaintiff has now come up with a certificate dated 18 October 2003 issued by the Village Committee of the Shek Mei Village, Dongguang, certifying that the Factory is owned by the Company. This seems to contradict what the plaintiff has said in his first affirmation.

55. That said, I do not find Mr Yuen's complaint valid. It should be borne in mind how the plaintiff advanced the passing off claim before the ex parte judge. It was not premised on the ownership of the Factory. Rather, the plaintiff laid much emphasis on the name "Li Wah" that the Company had used in connection with its garments, the close connection between the Company and the Factory and the strict quality control that the Company has had over garments produced by the Factory. Ownership of the Factory does not seem to be a material factor. Accordingly, even assuming that the two documents referred to in paragraph 53 above are pertinent to the issue of ownership, I am not satisfied that the plaintiff had failed in his duty to make disclosure of them. The 7th defendant's complaint in this respect fails.

DISCHARGING THE INJUNCTION

56. I now come to the question whether or not to discharge the Injunction in light of the material non-disclosure and misrepresentation on the plaintiff's part concerning his financial ability to honour the cross-undertaking. (This is the second question that I have identified in paragraph 6 above.) The answer is obvious. It must be discharged without going into the merits : see paragraph 27(4) above.

57. Mr Chan submitted that the Injunction should not be discharged on a number of grounds. First, the plaintiff has a strong case. He is in effect contending that because of the strong merits, the plaintiff should be absolved from providing an undertaking or from the consequences of any non-disclosure. Second, the evidence filed after the grant of the Injunction shows the defendants in bad light. He relied on the affirmation filed by Lo Fung Ping, a manager of Next (Asia) Limited and those filed on behalf of the 7th and 8th defendants which, he said, bolster the plaintiff's claims. Third, the chance of the plaintiff being unable to honour the cross-undertaking is remote, in light of the likely damage that the defendants may suffer as a result of the Injunction. None of these points, however, is tenable : see paragraph 27(6) and (7).

58. Accordingly, I will discharge the Injunction.

WHETHER TO GRANT A FRESH INJUNCTION

59. The next question that I need to determine is whether after discharging the Injunction, I should nevertheless grant a fresh injunction : see the third question in paragraph 6 above. It is only in very exceptional cases that the court will grant a fresh injunction upon discharge of an ex parte injunction on the ground of material non-disclosure. The plaintiff has failed in the utmost duty required of him. He is also guilty of misrepresentation. I do not see any special circumstances that may justify the granting of a fresh injunction. I will therefore refuse to exercise my discretion to do so.

OTHER QUESTIONS

60. In light of my decision above, it is not necessary to address the remaining questions that I have set out in paragraph 6 above. I will not go into the evidence and submissions concerned.

COSTS

61. On the questions of costs, I see no reason why costs should not follow the events. I will therefore make an order nisi that the 2nd to 8th defendants shall have the costs of the plaintiff's inter partes summons including any costs reserved, to be taxed if not agreed.