JIN JIANG INVESTMENT LTD AND ANOTHER v. 深圳市威廉金融控股有限公司 AND OTHERS

HCA 196/2021

[2023] HKCFI 3129

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 196 OF 2021

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D E C I S I O N

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BACKGROUND

1.  The background to these proceedings has been comprehensively set out in the Judgment of Coleman J dated 17 February 2022. For present purposes, it is sufficient to note that the plaintiffs’ case is that the defendants were part of a scheme that defrauded the plaintiffs under fictitious investment agreements which led to the plaintiffs having paid out HK$1,029,000,000 (the “Sum”).

2.  Pursuant to the Injunction Order continued by the Hon Coleman J on 17 February 2022 (the “Injunction”), amongst other things, a Mareva injunction was ordered against the 5^th defendant (“Wang Xu”) and the 6^th defendant (“State Frontier”) (together with other defendants) up to the amount of the Sum; and a proprietary injunction on Wang Xu and State Frontier regarding three cheques numbered 000163, 000164 and 000128 from the 8^th defendant Baijin Ltd amounting in total to HK$281,900,000.

APPLICATION

3.  This is the application by summons filed on 22 August 2022 (the “Summons”) by the intended 3^rd intervener (“CJ Securities”), the intended 4^th intervener (“CJ Asset”) and the intended 5^th intervener (“CJ Finance”) (together, the “CJ Parties”) to intervene in these proceedings and to vary the Injunction. The purpose of the variation is to enable assets of Wang Xu and State Frontier in their accounts with CJ Asset and CJ Securities to be used to discharge Wang Xu’s payment obligations owed to CJ Finance.

4.  The relevant accounts are set out as follows:

Account Numbers	Account Holder	Balance as of June 2022
100028026 (with CJ Securities)	Wang Xu (D5)	HK$744,373.32
313 (with CJ Asset)	Wang Xu (D5)	HK$750,244.90
102632500 (with CJ Securities)   (the “State Frontier Account”)	State Frontier (D6)	HK$5,990,957.44

5.  The plaintiffs are neutral to the variation in relation to Wang Xu’s accounts with CJ Securities and CJ Asset. They only object to the variation of the Injunction affecting the State Frontier Account.

6.  As such, leave will be granted to CJ Securities, CJ Asset and CJ Finance to participate in the present proceedings such that CJ Securities will become the 3^rd Intervener, CJ Asset will become the 4^th Intervener and CJ Finance will become the 5^th Intervener for the purposes of their application to vary the Injunction.

7.  The Injunction will be varied such that CJ Securities, CJ Asset and CJ Finance will be allowed to utilize the funds in Wang Xu’s accounts with CJ Securities and CJ Asset to discharge his obligations owed to CJ Finance.

8.  It is thus only necessary to deal with the variation of the Injunction in relation to the State Frontier Account at the hearing.

APPLICABLE PRINCIPLES

9.  The applicable principles are trite: a creditor of the injuncted party may apply to vary an injunction that affected his rights to enforce against the injuncted party. However, the Court must be satisfied that the payment is for bona fide business debts of the injuncted party[1].

10.  The applicant for variation bears the burden of persuading the Court that “the proposed payment from the proposed source would not be in conflict with the principle underlying the Mareva jurisdiction”[2].

11.  Clarke J in Compagnie Noga D’Importation et D’exportation SA v Australian and New Zealand Banking Group and ors[3] set out in paragraph 9 of the Judgment the relevant principles:

“(iii) In determining whether or not to allow the variation proposed the court is concerned to examine whether to do so would be consistent with the policy that underpins the jurisdiction, namely that a defendant should be restrained from evading justice by disposing of assets otherwise than in the ordinary course of business with the result that any judgment goes unsatisfied[4].

(iv) The correct test is “to consider objectively the overall justice of allowing the payment to be made including the likely consequence of permitting it on the prospects of a future judgment being left unsatisfied, and bearing in mind that the assets belong to the defendant and that the injunction is not intended to provide the claimant with security for his claim or to create an untouchable pot which will be available to satisfy an eventual judgment.[5]”

PAYMENT OBLIGATIONS

12.  The payment obligations of HK$18,792,522.61 (as at 31 July 2022) owed by Wang Xu to CJ Finance were said to have arisen from a promissory note dated 4 May 2018 (the “Promissory Note”). Wang Xu had failed to repay the Promissory Note after the maturity date (after multiple extensions) on 5 December 2018.

13.  The CJ Parties’ case is that, by reason of two letters signed by Wang Xu purportedly on behalf of State Frontier instructing CJ Securities to make payment from State Frontier’s Account on 29 November 2019 (the “2 Letters”), Wang Xu as director and sole beneficiary of State Frontier authorized CJ Securities to utilize State Frontier’s securities in an account with CJ Securities to repay the Promissory Note. 1.5 million shares of Car Inc were transferred to the State Frontier Account on 19 December 2019. Such shares were bought back pursuant to a privatization and the proceeds were credited into the State Frontier Account. These proceeds are now subject to the Injunction.

GROUNDS RELIED UPON BY THE CJ PARTIES

14.  Mr Tso, counsel for the CJ Parties relied on the following in support of the variation sought:

1)  The CJ Parties had had an existing right to payment against the amounts standing to the credit of and contained in the State Frontier Account before the Injunction.

2)  The variation will be no more than the court sanctioning a payment that would have been made out had there been no injunction. State Frontier had in fact been repaying the Promissory Note for Wang Xu before the deposit of securities.

3)  As borne out from the evidence, State Frontier had already been parted with the 1.5 million shares of Car Inc in partial discharge of the Promissory Note as on 19 December 2019. Therefore, those shares would no longer be available to satisfy any judgment debt in favour of the plaintiffs should the plaintiffs succeed eventually.

PLAINTIFFS’ OBJECTIONS

15.  Mr Chong, counsel for the plaintiffs raised the following objections in relation to the variation in relation to State Frontier’s payment obligations owed to CJ Finance:

1)  The authenticity of the 2 Letters are challenged. Mr Chong submitted that in any event, even assuming the 2 Letters are authentic, they only showed Wang Xu’s intention to confer authority on CJ Securities to make payments from the State Frontier Account in favour of CJ Finance (emphasis added).

2)  Mr Chong submitted that at the time when the 2 Letters were signed, the privatization of Car Inc had not yet taken place, and yet the 2 Letters only contemplated and authorized a withdrawal of money, and not a transfer of shares from the State Frontier Account. As such, it was submitted that there was no intention to utilize the shares in State Frontier’s Account (as opposed to cash) to offset Wang Xu’s indebtedness. Moreover, the space as set out in the 2 Letters for the amount of money having been authorized to be transferred to CJ Securities was not yet filled out. It was therefore submitted that there was no concluded agreement.

DETERMINATION

16.  The arrangement in place relied upon by the CJ Parties is one where Wang Xu is using the assets of State Frontier to repay his own debts. Ultimately the court needs to decide whether this arrangement falls into the category of ordinary course of business of State Frontier and whether the proposed payment from State Frontier in conflict with the principle underlying the Mareva jurisdiction.

17.  I am of the view that the application to vary the Injunction in relation to the State Frontier Account ought to be dismissed for the following reasons:

1)  I agree with Mr Chong’s submissions that the 2 Letters are not evidence of any concluded agreement between Wang Xu and the CJ Securities for the use of State Frontier’s assets to offset Wang Xu’s indebtedness. This conclusion is further supported by the fact that:

i)  It was the CJ Parties’ evidence that despite the 2 Letters, the funds in the State Frontier Account had not yet been utilized to offset Wang Xu’s indebtedness because in anticipation of the price of the shares to go up, Wang Xu had requested that the Car Inc shares should not be liquidated at that time. This confirms that as at 29 November 2019 (when the 2 Letters were signed), there was not yet any concluded agreement between Wang Xu (for and on behalf of State Frontier) and CJ Securities conferring a right to utilize State Frontier’s assets to offset Wang Xu’s indebtedness. It was clearly accepted by the CJ Parties that the instructions of Wang Xu in the 2 Letters were subject to further instructions and directions from Wang Xu.

ii)  The confirmation issued by CJ Asset and signed by Wang Xu dated 29 April 2020 (the “Confirmation”) only referred to the utilization of the charged shares to off-set the indebtedness of Wang Xu under the Promissory Note. There was no mention of the arrangement as provided for in the 2 Letters. The 2 Letters were dated 29 November 2019, before the Confirmation was signed. If there was truly an agreement in place for the CJ Parties to utilize the assets in the State Frontier Account to offset Wang Xu’s indebtedness by reason of the 2 Letters, the Confirmation would have also mentioned the utilization of the assets/proceeds in the State Frontier Account to offset Wang Xu’s indebtedness.

iii)  In HCA 496/2021, an action commenced by CJ Finance on 31 March 2021 in relation to Wang Xu’s indebtedness under the Promissory Note (after the Injunction was obtained), only Wang Xu was named as a defendant, and not State Frontier. Mr Chong thus submitted, and I accept, that as at 31 March 2021 it was not yet CJ Finance’s case that they were entitled to use the proceeds in the State Frontier Account to offset Wang Xu’s indebtedness.

iv)  Although the Car Inc Shares had been transferred to State Frontier’s account with CJ Securities, it is accepted by Mr Tso that they are still under State Frontier’s Account and are thus beneficially owned by State Frontier. There is thus no basis to allege that State Frontier had already parted with the 1.5 million shares of Car Inc on 19 December 2019.

2)  In any event, even if I was wrong on the above conclusion, there are the following factual disputes as to the arrangement between Wang Xu, State Frontier and CJ Securities as set out in the 2 Letters such that it would not be possible for the court to accept at this juncture that a debt is owed by State Frontier to CJ Finance without a trial:

i)  The authenticity of the 2 Letters;

ii)  Whether the 2 Letters were created with a view to defraud State Frontier’s creditors, including the plaintiffs and are void under section 60 of the Conveyancing and Property Ordinance (Cap 219). CJ Finance denies knowledge of such breach and claims to be a bona fide purchaser for value.

iii)  As the debts were not incurred by State Frontier, whether State Frontier has any obligation to repay CJ Finance, and whether there was any justification for Wang Xu to appropriate moneys belonging to State Frontier to discharge Wang Xu’s payment obligations.

iv)  There is also dispute as to whether State Frontier belongs to Wang Xu beneficially. Upon the present application being taken out, Wang Xu has only indicated his neutral stance and has not expressly acknowledged that his debt is to be paid from State Frontier’s Account. Further, Wang Xu’s defence indicated that he had never disposed of securities held in State Frontier without instructions or agreement of Wang Tao (Wang Xu’s sister), as some of the investments were joint investments of himself and Wang Tao. This indicates that at least some of the assets in State Frontier do not belong beneficially to Wang Xu. The PRC Judgment dated 2 June 2020 also referred to State Frontier being controlled by Wang Tao. Whether the proceeds of the Car Inc shares in State Frontier’s Account beneficially belong to Wang Xu will need to be examined at trial.

3)  Mr Tso submitted that the funds in the State Frontier Account had in fact already been utilized to set off Wang Xu’s indebtedness in the past. However, if Wang Xu was not entitled to use the funds in State Frontier to pay off his own debts, the fact that he had done so in the past would not lend legitimacy to similar subsequent arrangements.

4)  Further, State Frontier is clearly one of the entities alleged to be involved in the scheme of fraud. Even if the CJ Parties are not part of the fraud and there is no suggestion that this was an attempt on their part of abuse through unwarranted dissipation of assets, the circumstances are such that allowing the application may inadvertently assist Wang Xu in decreasing his own personal indebtedness and evading justice by a disposition of State Frontier’s assets.

5)  I am thus of the view that the arrangement for Wang Xu’s indebtedness to be repaid with State Frontier’s assets cannot be said to be in the ordinary course of State Frontier.

COSTS

18.  Costs follow the event.

19.  The CJ Parties have succeeded in their application to vary the Injunction to the effect that the 3^rd - 5^th Interveners are allowed to withdraw from the 5^th Defendant’s account numbered: 1) 313 with the 4^th Intervener; and 2) 1000028206 with the 3^rd Intervener (the “D5 Account Variation Application”). The 1^st and 2^nd plaintiffs should logically therefore bear costs of such application up to and including the date when the 1^st and 2^nd plaintiffs first indicated that they would not object to such application.

20.  However, I accept Mr Chong’s submission that the CJ Parties had failed to provide sufficient information to the plaintiffs prior to the Summons having been issued, so that the first opportunity of when the plaintiffs could consider the merits of the D5 Account Variation Application was when the CJ Parties filed the Summons and their affirmation in support. After that the plaintiffs had promptly indicated their neutral stance when the 8^th affidavit of Mr Vrijmoed was filed on 7 December 2022. I therefore order that there be no order as to costs in relation to the D5 Account Variation Application.

21.  As the CJ Parties have failed in their application to vary the Injunction to the effect that the 3^rd - 5^th Interveners be allowed to withdraw from the State Frontier’s Account (the “D6 Account Variation Application”), they should pay for the costs of and occasioned by such application to the 1^st and 2^nd plaintiffs, with certificate for counsel, to be summarily assessed, if not agreed.

22.  For the avoidance of doubt, no part of the hearing time was devoted to the D5 Account Variation Application and the entirety of the hearing was devoted to the D6 Account Variation Application.

23.  The above costs orders are orders nisi, which will become absolute if no application to vary is made within 14 days hereof.

ORDERS

24.  I therefore grant the following orders:

1)  For the purposes of their application to vary the Injunction, leave be granted to the 3^rd - 5^th Intended Interveners to participate in the present proceedings, such that:

i)  the 3^rd Intended Intervener will be the 3^rd Intervener;

ii)  the 4^th Intended Intervener will be the 4^th Intervener; and

iii)  the 5^th Intended Intervener will be the 5^th Intervener.

2)  Paragraph 1 of the Order dated 1 February 2021 granted by the Hon Coleman J, as extended by the Order of His Lordship on 19 February 2021 and varied by the Hon Anthony Chan J on 7 September 2021 and further continued by the Hon Coleman J on 17 February 2022 (the “Injunction”) be varied such that the 3^rd - 5^th Interveners be allowed to withdraw:

i)  amounts standing to the credit to

ii)  proceeds of securities and

iii)  proceeds of bonds

held in the 5^th Defendant’s account numbered:

a)  313 with the 4^th Intervener

b)  1000028026 with the 3^rd Intervener

to discharge the 5^th Defendant’s obligation under the agreements as set out in the Schedule to the summons filed on 18 August 2022.

3)  The application to vary the Injunction to the effect that the 3^rd - 5^th Interveners be allowed to withdraw:

i)  amounts standing to the credit to

ii)  proceeds of securities and

iii)  proceeds of bonds

held in the 6^th Defendant’s account numbered 102632500 with the 3^rd Intervener to discharge the 5^th Defendant’s obligation under the agreements as set out in the Schedule to the summons filed on 18 August 2022 be dismissed.

4)  There be no order as to costs for the application to vary the Injunction to the effect that the 3^rd - 5^th Interveners be allowed to withdraw from the 5^th Defendant’s account numbered: 1) 313 with the 4^th Intervener; and 2) 1000028026 with the 3^rd Intervener.

5)  Costs of and occasioned by the application to vary the Injunction to the effect that the 3^rd - 5^th Interveners be allowed to withdraw from the 6^th Defendant’s Account numbered 102632500 with the 3^rd Intervener be paid by the 3^rd - 5^th Interveners to the plaintiffs, with certificate for counsel, to be summarily assessed, if not agreed.

6)  The costs orders are orders nisi, which will become absolute if there is no application to vary them within 14 days hereof.