HELM HONG KONG LTD v. AU TAT KEI, DECKY

HCA 1517/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1517 OF 2006

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J U D G M E N T

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Introduction

1.  The Plaintiff is a Hong Kong subsidiary of a German company, Helm AG, which carries on the business of marketing and sourcing of chemical products.

2.  The Defendant was the Credit and Operations manager and Head of the Shipping Department of the Plaintiff until he was dismissed on 30 June 2006.  The Plaintiff says that he was the second most senior staff of the Plaintiff at the time of his dismissal.  This is disputed by the Defendant.

3.  The Plaintiff’s case is that the Defendant, together with other named individuals who were at one time employees of the Plaintiff, conspired to defraud the Plaintiff.  One of the individuals accused of conspiracy is Mr Mark von Torklus, who was the managing director of the Plaintiff during the period from February 1998 until his dismissal on 15 June 2006. There is also an allegation that the Defendant diverted business away from the Plaintiff.  This aspect of the case has not, however, featured in the submissions before me and I say no more about it.

4.  The Plaintiff had, on 19 July 2006, obtained an ex parte world wide Mareva injunction order from Lam J against the Defendant up to the limit of HK$9,000,000.  It then took out an inter parte summons for the continuation of that order until trial or further order.  On 28 July 2006, Barma J continued the injunction pending the determination of the summons, and ordered the Plaintiff to provide fortification of its cross-undertaking as to damages in the sum HK$250,000.  I am now seised of that summons.

5.  The arguments before me focused mainly on the question whether the Plaintiff has established a good arguable case and whether the evidence discloses that there is a real risk that judgment that may be obtained by the Plaintiff may go unsatisfied.  Mr Bullett also made some submissions on material non-disclosure which I shall deal with later in this judgment although the Defendant has neither issued a summons nor otherwise alerted the Plaintiff of his intention of so doing.

Apparent strength or weakness

6.  The Plaintiff has filed a number of affirmations from its existing and former staff.  The Defendant made three affirmations.  It is not the function of the Court at this stage to make any finding of fact or attempt to resolve conflicts of evidence disclosed in these various affirmations.  The Court is, however, both entitled and obliged to take into account the apparent strength or weakness of the parties’ respective cases to decide whether the Plaintiff’s case, on the merits, is sufficiently strong to cross the threshold of a good arguable case and on the ultimate question of whether it is just and convenient to continue the Mareva injunction.  I emphasize the word “apparent” because this is still at a relatively early stage in the proceedings.  The real strength or merits of the parties’ case has not been tested by cross-examination.  Discovery has not gone beyond the production of exhibits in the parties’ respective affirmations.

7.  With that caveat, I shall proceed to set out in very broad outline the parties’ respective cases and consider some of the more salient evidence relied on.

8.  The Plaintiff’s case is that the conspiracy to defraud took place over a period of years from 2000 and 2006.  The alleged conspiracy related to what is called “the Renminbi business”.  This business involved (i) the purchase of chemical products by the Plaintiff, (ii) the onward sale of such products by the Plaintiff to an agent in the Mainland of the People’s Republic of China (“the PRC”), (iii) the warehousing of such products by the agent in the PRC and (iv) the sale and distribution of such products by the agent to the Plaintiff’s customers in the PRC.  One of the agents is an entity called Zhejiang Grand Import and Export Co. Ltd.

9.  The Plaintiff alleges that the latter part of the transactions, i.e. the sale and receipt of the sale proceeds from the ultimate PRC buyers were not recorded in the Plaintiff’s accounting records.  It is alleged that the Defendant instructed the agents and end customers to make payments due to the Plaintiff either to himself or directly into PRC bank accounts held in his personal name.

10.  What is not disputed is that the Defendant did open and operate a number of bank accounts in the PRC, and that some of the receipts from the Renminbi business were paid into these accounts.  The Defendant says that because of foreign exchange control in the PRC, it was impossible for customers in the PRC to transfer money directly to the Plaintiff in Hong Kong.  The PRC customers would thus either pay in cash or make banking transfer within the PRC.  It is said that some might take that course to avoid the payment of VAT.  The Defendant maintains that it was Mr von Torklus who instructed him to open some local bank accounts in the PRC.  He accepts that he held those accounts on behalf of the Plaintiff.

11.  The Defendant further says that the sums in these accounts were either used to disburse proper business expenditure on behalf of the Plaintiff or had been fully paid to the Plaintiff.

12.  In paragraph 17.8.3 of its Statement of Claim, the Plaintiff alleges that the Defendant paid not less than RMB1,049,777.75 out of these PRC accounts to Mr von Torklus.  The Defendant does not dispute he made substantial payments out of the PRC bank accounts to Mr von Torklus.  He said he did so because Mr von Torklus said he needed the money to settle some claims against the Plaintiff and the Defendant trusted him to account properly for the monies.  Mr Bullett points out that even if these payments were not properly authorized and did cause the Plaintiff loss, the Plaintiff had recouped its loss from Mr von Torklus under the terms of an agreement dated 15 June 2006.  Under clause 4a of that agreement, Mr von Torklus agreed to pay a lump sum of EUR200,000 as compensation for all damages incurred to the Plaintiff by Mr von Torklus’ violation of contract.  Clause 12 of that agreement went on to provide that if all obligations under the agreement were duly performed, all mutual demands of both parties resulting from the employment relationship between Helm AG and Mr von Torklus including its termination will be null and void.  Mr Struck, the current managing director of the Plaintiff, disclosed this agreement in his 1^st affirmation filed in support of the ex parte application, and stated that this agreement was reached at the time when an investigation into the conduct of Mr von Torklus and the damage or loss suffered by the Plaintiff had not commenced.

13.  In paragraph 17.8.5 of its Statement of Claim, the Plaintiff particularised further sums which it says the Defendant wrongfully transferred to third parties without the Plaintiff’s proper authority.

14.  The Defendant has provided explanations for all payments made to third parties.  These are pleaded with full particulars in paragraph 17 of his Defence.  It is fair to point out that in respect of two sums (US$160,000 and US$134,126) which the Defendant maintains have been received by the Plaintiff, his defence appears to be borne out by the evidence.  In respect of the sum of US$160,000, the Defendant applied for leave at the hearing (which I granted) to file his 3^rd affirmation in which he exhibited a copy of an application of remittance of the sum to the Plaintiff.  Mr Blanchflower produced to the Court a copy of a credit advice from the Plaintiff’s banker showing the receipt of that remittance.  Mr Blanchflower outlined the instructions he received in respect of what the Defendant allegedly said to Miss Tiffany Kwok (“Miss Kwok”), the Plaintiff’s internal accountant, at the time, which is said to contradict the Defendant’s explanation.  Be that as it may, the evidence does bear out the Defendant’s plea that the money was received by the Plaintiff.  As for the sum of US$134,126, the Defendant’s case that he handed various sums in cash to Miss Kwok between 16 November 2005 and 17 November 2005 does not appear to be contradicted, although the Plaintiff relies on certain MSN messages recorded to have passed between the Defendant and a friend of his, Mr Sus Eun Seok, from which the Plaintiff asked the Court to draw the inference that the sum of US$130,000 still remained with the friend on 21 November 2005.

15.  What is also not in dispute is that a number of accounts called running accounts showing the income and expenditures in the Renminbi business were kept by one Ms Datchy Lau who worked under the Defendant.  She is named as one of the alleged co-conspirators.  These running accounts recorded that payments were made from time to time to the Plaintiff.  Significantly, Miss Kwok not only confirmed that those payments have actually been received by the Plaintiff, but also acknowledged that she was aware of the existence of the running account.  She stated, however, that she was not aware of the existence of the PRC accounts which the Defendant maintained and operated.

16.  The Defendant also deposed to having kept full records of his bank accounts in the PRC in the computer he previously used in the Plaintiff’s office.  With the assistance of computer specialists, the Plaintiff has been able to gain access to the personal document files of the Defendant maintained in his computer.  Those statements have been available to the Plaintiff some three months prior to the hearing.

17.  On the evidence before me, I see much force in the Defendant’s contention that the Plaintiff’s accounting records leave much to be desired.  It is important to bear in mind that although the Plaintiff’s witnesses assert that the Defendant occupied a position akin to that of a financial controller, Mr Blanchflower accepted that the Defendant was not responsible for the preparation of the Plaintiff’s accounts.  Miss Kwok’s evidence is that she was the only person who had access to the Plaintiff’s accounting system.

18.  Mr Bullett made in my view a valid forensic point that had there been anything in the evidence to point to the Defendant pocketing any money of the Plaintiff, one would have expected the Plaintiff to have adduced evidence, with the assistance of forensic expert, to establish a specific case of fraud against the Defendant.

19.  This is not to say that the Defendant would not have a lot of explaining to do.  For example, it does appear odd that the Defendant had operated bank accounts in his name to keep what is admittedly the Plaintiff’s money but that this was not known either to the Plaintiff’s internal accountant, Miss Kwok, or to the Plaintiff’s auditors.  It is also quite remarkable that the Defendant would routinely pay to the then managing director sums of RMB50,000, again apparently without informing either Miss Kwok or the auditors.  The Defendant contends that the Renminbi business was known to the Plaintiff and was the subject of discussions with the Plaintiff’s internal auditors.  This is specifically denied by Mr de Carvalho, one of the internal auditors based in Helm AG’s office in Hamburg who visits Hong Kong from time to time.  A document entitled “P & L Summary – Zhejiang Grand” retrieved from the computer used by Ms Datchy Lau showed a number of transactions with the prefix R30 said to denote the “Reminbi business” That document shows a total profit of RMB9,174,915.97, but the Defendant says in his affirmation that the document was not complete, and the overall result with Zhejiang Grand should be a loss.  Ms Patty Lau Hin Wai, who described herself as a secretary and co-ordinator in the employ of the Plaintiff, affirmed that the “second part” of the Renminbi business has never been recorded in any of the Plaintiff’s official systems.  In addition, she deposed to the Defendant telling her that the files for the “second part” of the Renminbi business must not be shown to the Plaintiff’s auditors.

20.  All in all, I am of the view that there is sufficient evidence at this stage for the Plaintiff to overcome the requirement of a good arguable case, bearing in mind that this is not a particularly high threshold: see Gee, Commercial Injunction, 5^th ed., para. 12.023.  However, on the evidence before me, even assuming that Mr von Torklus had no right to receive the RMB1,049,777.75 pleaded to have been paid by the Defendant to him, the picture is not inconsistent with the Defendant being a rather gullible employee being used unwittingly to further Mr von Torklus’ design.  Whether this is so remains to be seen and I must not be taken to be expressing any view on this one way or the other.  I am conscious of the fact that what happened with regard to the Renminbi business lies peculiarly within the knowledge of Mr von Torklus and of the Defendant, and I have been reminded by Mr Blanchflower that the Plaintiff casts a much wider net than the claim in respect of the specific sums pleaded in the Statement of Claim.

Risk that the judgment may go unsatisfied

21.  It is trite that Mareva injunctions are not granted merely to provide security before trial to the Plaintiff, even if the Plaintiff appears likely to succeed – speaking generally and not with reference to the present case.  Authorities show that in order to obtain a Mareva injunction, Plaintiffs must show that they would suffer prejudice as a result of the risk of assets being dissipated or rendered unavailable for execution.  The decision of the English Court of Appeal in Ninemia Corporation v Texas GmbH [1983] 1 WLR 1412 shows that the test of risk of dissipation is objective.  A Plaintiff is not required to satisfy the court that the Defendant would remove his assets out of the reach of the Plaintiff for the purpose of defeating any judgment which the Plaintiff might obtain against him.  The fact that a Defendant openly arranges to leave the jurisdiction with his family and assets pursuant to a plan made long before the commencement of the action may provide the basis for the grant of Mareva relief, because the Court is concerned with the effect of the Defendant’s conduct as opposed to the motives underlying it: see ULFCAR International AS v Miles, Court of Appeal, unreported, 29 August 1991.  However, the mere fact that the conduct of a Defendant is likely to deplete the assets available for judgment is not sufficient.  A Defendant is obviously entitled to incur expenses in going about his ordinary life or business and spend money in defending himself against the claim.  For the Defendant’s conduct to be relevant, it must be such as to deplete his assets otherwise available for execution of any judgment that may be obtained against him.

22.  In the present case, the Defendant is indigenous to this territory.  He is married.  His wife is a certified public accountant and works in the private sector.  His has filed evidence of his means pursuant to the order of Lam J.  He disclosed that his only substantial asset is his matrimonial home which is jointly owned with his wife.  The property is mortgaged and has a net equity of about HK$1.4 million, although he claims there is also an outstanding loan to his mother-in-law.

23.  Mr Blanchflower relies on the fact that the Defendant has been shown to be adroit in having substantial amounts of cash moved across the border as evidence of risk of dissipation of assets.  This fact, whilst relevant, may be said to go to show ability, and not necessarily propensity.  I should also take into account the fact that the Plaintiff has shown a good arguable case for alleging that the Defendant has been involved in a conspiracy.  That itself may be sufficient for the Court to take the view that there is sufficient risk to justify granting Mareva relief.  On the other hand I bear in mind that the Defendant has not, despite the investigation which the Plaintiff has so far conducted, been shown to have made any personal gain from the Renminbi business or be wanting in his explanations for sums drawn from the PRC accounts.

24.  Mr Bullett informed the Court that the Defendant and his wife are currently expecting a baby, and that the Defendant was thinking of selling the matrimonial flat to realize some cash for the conduct of the defence of this action.  I am told that the parties are in negotiation with the view to arriving at a variation of the injunction order.  The matter initially gave me some concern, insofar as the open declaration of an intention to dispose of his major assets, albeit said to be for a wholly legitimate reason, may, if carried out, have the effect that the only substantial asset of the Defendant would be out of the Plaintiff’s reach in the execution of any judgment that the Plaintiff may be able to obtain against him.  Nevertheless, I consider that I should not take this intimation against the Defendant.  Assuming that the Defendant sells the property merely to realize sufficient money to raise funds for the defence of this action, whilst his assets would thereby be depleted, it would not have the effect of depleting his assets otherwise available for execution of judgment.

Whether just and convenient to grant the injunction sought

25.  The ultimate question for the Court is whether it is just and convenient to continue the injunction, having regard to the apparent strength of the Plaintiff’s case, the risk (if any) that the Defendant may embark upon conduct which has the effect of depleting his assets otherwise available for the execution of any judgment that may be obtained against him and, of course, the undoubted prejudice which a Defendant would be subjected to the grant or continuation of this kind of order.  I confess to not finding this an easy question to decide in the circumstances of the present case.  My judgment, in the end, is that the Plaintiff has not persuaded me that it is just and convenient to continue the injunction.  The position now is, in my view, materially different from that which obtained when Lam J granted the ex parte order.  The Defendant has gone some way towards explaining his conduct.  In some material respects, his explanation appears to be supported by documentary evidence or otherwise not subjected to challenge.  Although some of his explanations are being disputed by the evidence of the Plaintiff’s staff, it would not be fair for me to proceed on the basis that his version would be rejected at the trial.  There is also room for misunderstanding.  The evidence presently available does not show that the Defendant has derived any personal benefit from the conduct (both his and others) that is being impugned.  In the circumstances, I would decline to continue the injunction.

Material non-disclosure

26.  Lastly, I should deal briefly with Mr Bullett’s argument on material non-disclosure.  Two matters were raised in support of this contention.  The first relates to the fact that under the agreement between Mr von Torklus and Helm AG, the latter would receive a lump sum of EUR200,000 as compensation for all damages incurred to the Plaintiff.  The short answer to the point is that the matter was disclosed.  The second relates to the circumstances in which Ms Patty Lau’s employment was terminated after she made an affirmation in support of the Plaintiff’s application.  Mr Bullett contends that the Plaintiff must have entered into some arrangement with her.  Ms Patty Lau made an affirmation on 12 September 2006 and, according to the Statement of Claim, her employment terminated on 30 September 2006.  Not only did her termination occur after the grant of the ex parte order, the Court has no basis to infer that such arrangement, if any, that she has entered into with the Plaintiff has any bearing on the matters relevant to the continuation of the injunction order.  For these reasons, I would reject Mr Bullett’s argument on material non-disclosure as a ground for setting aside the injunction.

Order

27.  For the reasons I have endeavoured to state, I would dismiss the Plaintiff’s summons.  The injunction granted ex parte by Lam J would accordingly lapse.  I make an order nisi that the Defendant should have his costs in the cause.  There be liberty to apply.